I am a member of SIGNet and submitted the following on Litigation Capital Management (LIT) for discussion at our meeting this week. A full agenda sadly meant this discussion item was deferred to another time. Oh well, you can read what I submitted in the meantime. I will report back any feedback from here to the members!
Maynard
Litigation Capital Management (LIT) 30 November 2021
(All $ figures AUD = 1.83 GBP)
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£134m (113p) market cap litigation funder based in Australia, with operations also in the UK and traded on AIM (floated Dec 2018).
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Litigation activities involve commercial disputes, insolvency claims and class actions.
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Boasts 10-year "cumulative portfolio ROIC"of 153% and investment timescale of only 27 months.
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Holds 44 current litigation investments that could have $7b claim size:
- Boasts long history of successful cases and settlements:
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Reported book value is $90m or 41p per share. P/NAV therefore 2.75x
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Premium to book reflects optimistic “theoretical” reinvestment projections…
- …and upbeat investors:
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But are the projections realistic?
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Last four years (2018 to 2021) show total revenue (i.e. income from resolved litigation cases) of $140m generated from litigation service expense (i.e. investments into the associated litigation cases) of $55m:
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The investment return from the cases resolved during the last four years is therefore $140m/$55m = 156%
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LIT says typical case return should reduce to ‘just’ 100%.
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LIT has $181m to invest, of which $104m is invested and $77m is awaiting a suitable case:
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The $77m still to be invested highlights LIT is not always fully invested. Suitable cases need to appear before the cash can be deployed. The proceeds from settled cases are therefore unlikely to be reinvested immediately.
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LIT says larger cases will extend the timescale from 27 months to 36 months. My sums below assume reinvestment takes place after 48 months to allow for suitable cases to emerge.
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Note that LIT’s $181m to invest is represented by cash of $36m + case investments of $89m + third-party fund interests of a net $56m
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The above “theoretical” presentation calculations do not account for costs.
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Operating costs for 2021 were almost $14m. My sums below assume $14m per annum, then rising to $18m per annum after four years and then rising to $22m per annum after eight years to reflect greater/larger investment cases:
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My sums use the same "theoretical" fund performance fees (FPF) as stated by LIT.
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All those assumptions suggest the $181m could turn into $1.8b or £1.0b after 12 years.
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Not all of this £1.0b would be LIT’s as c30% of the starting $181m is held by third-party fund investors.
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But difficult to work out exactly LIT’s share of the possible £1.0b given the fund fees projected to be reinvested, but let’s say 75% or £750m.
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There is also the subject of tax, which is zero within these sums but is 30% for Australian companies of LIT’s size. LIT has yet to pay tax (I am not sure why).
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Bear in mind LIT’s history of 100%-plus case ROICs has involved small amounts of capital. Extrapolating such case ROICs with much larger amounts may be optimistic:
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Note also that LIT has only 44 cases at present, which implies returns can be dictated by just a handful of settlements each year. 65% of 2021 revenue was generated by one case (60% of 2020 revenue by three cases)
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Turning a £134m market cap into a balance sheet worth £750m over 12 years is a 15% CAGR. Enough of a return to justify an investment over such a long period?
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Sums also assume the shares in 2033 trade close to book value. In reality, if case ROICs continue at 100%, the valuation may retain a premium to book (presently 2.75x).
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Investment proposition inherently boils down to whether LIT can continue to enjoy case ROICs of 100%. Do charts such as this imply overly bullish management?
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