Earlier this month we published a wire on JustKapital Litigation Partners (ASX:JKL), and shared our view that the company has an enormous growth opportunity in front of it, is led by impressive management and remains significantly undervalued. On Friday JKL announced that the acquisition of Macquarie Medico Legal (MML) is now complete, which provides an opportunity to share a bit more information on this business.
MML, founded in 2007, is a leading provider and funder of medical and expert reports for law firms pursuing common law personal injury cases. MML handles the entire process of acquiring a medical report through access to their 350+ network of specialists and then funds the disbursement until the case settles (typically 18 months), with the loan guaranteed by the law firm.
The market for disbursement funding has been assessed at north of $1b, with the niche market of medical and expert reports worth more than $300m (we will see MML move into providing and funding additional disbursements in time). The market has grown rapidly as law firms, who have increasingly offered ‘no win-no fee’ cases, have recognised the importance of managing cash flow and the benefits to the business that externally funding the disbursement can provide. We expect that growth to continue and note that virtually all customers have indicated an enormous amount of pent up demand for the service MML provides.
MML’s customer base, which covers more than 200 law firms, consists of the large independent firms who in some cases have millions of dollars of the partners money tied up in disbursements. 60% of the work is spread across the top 10-15 firms, with no significant customer concentration in the debtor book. The likes of Slater & Gordon (ASX:SGH) and Shine Lawyers (ASX:SHJ) are not clients as they typically fund disbursements with their captive finance provider and charge the client high rates of interest on this loan from the moment the disbursement is incurred. Any ongoing issues with these publicly listed law firms will actually prove a net benefit to MML as lawyers and their case files continue to move over to the independent and boutique firms.
The value proposition of MML is very simple. Over 95% of these personal injury cases end up settling. The average settlement is typically in the hundreds of thousands of dollars. The law firms fee averages $40-$80k. The disbursement is a comparatively tiny $2.2k. In return the firm has their working capital constraint removed, the process of acquiring the report is entirely outsourced and the firm is able to pursue more cases and grow the business with the resources - financial and operational - that are freed up by using MML. Investors should note that the market for disbursement funding in the US is booming and we expect the same to occur here.
Bad debts are very low, averaging 2%, owing to the funds being guaranteed by the law firm. Defaults are virtually non existent and there are numerous backstops in place to protect from non-performing loans.
MML achieved EBIT of $4.1m in FY15 on revenue of $11.6m, representing 40% compound growth over the last three years. The pent up demand for their service is enormous with the only prior constraint being that the business was entirely internally funded prior to acquisition by JKL. With the $20m debt facility secured in December there is now plenty of capacity to grow the business and a doubling of revenue in the first year of ownership is certainly achievable, which would result in EBIT of ~$8m and starts to look very attractive for a company capped at just $28m.
While JKL is often compared to its ASX-listed peer IMF (ASX:IMF) we think a better comparison of what management are trying to achieve is the UK listed Burford Capital (LON:BUR). Investors would be wise to take a look at that business to better understand where JKL is headed.
The above is all without mentioning the very lucrative but longer duration nature of the litigation funding business, which is a topic for another day. Suffice to say that both of the currently funded cases have a strong chance of concluding in the next six to twelve months and any success would result in fees that would surprise the market in their quantum.
JustKapital remains both under the radar and significantly undervalued. There is a clear path to grow this business and we believe management are very capable of doing so. Capital H has a large position in JKL.
Your report on JKL was a great read! Keep up the great work Harley!
Great work, please keep it up. Gianni
Interesting write up, really enjoyed it. Have been looking through the company filings since - this business model is interesting and reasonably simple (the newly named JKL Finance). What I can't get my head around is the funding model - corporate bonds, multiple credit facilities from several parties at low double digit rates. Is this sustainable? Or is there a risk that a "cash crunch" happens when the interest bills aren't covered by recoveries from loaned funds to clients? And if yes, is there a way an individual investor can figure this out prior to the company reporting it?