Manolete Partners (MANO): Profit warning January 2021

I covered MANO for SharePad during November and this litigation funder warned on profits the other week. Let’s see what’s occurred.

The RNS said:

As highlighted in the Company’s interim results for the six months ended 30 September 2020 (announced 10 November 2020), new case enquiries had begun to slow sharply due to the extraordinary UK Government economic support measures that have directly led to a large decrease in the number of UK company insolvencies since the start of the Covid-19 pandemic. This has continued throughout Q3 and into the first few weeks of Q4. The Government measures are planned to continue through to April 2021 at least and so we expect the negative impact on the Company’s level of new cases (which continue to be subject to our stringent levels of selection criteria) to persist for the remainder of the current financial year ending 31 March 2021.

Fewer new cases means less in the way of ‘unrealised gains’ :point_down::

“As a consequence of the above factors, the Board expects realised profits to be above, but unrealised profits to be significantly below, market expectations and therefore for the Company to be overall marginally EBIT profitable in H2.”

To recap, MANO treats its litigation investments as financial instruments and accounts for them using IFRS 9. As such the company can apply ‘fair-value’ accounting and book unrealised gains as revenue. Unrealised gains are the difference between the initial cash investment and the company’s estimate as to what that investment will eventually be worth.

The explanation of the slower rate of investments seems valid to me, and the share price dropping from 305p to 195p seems understandable as well. The market cap was £133m when I wrote about MANO and yet at the time its net asset value – mostly the litigation investments stated at management’s fair value – was only £39m.

A 195p share price now supports an £85m market cap, so a large premium to book still exists.

Working out exactly where book value stands following the latest RNS is difficult. MANO says:

The 95 completed cases for the nine months to 31 December 2020 generated a gross total settlement value of [1]£23.9m, comfortably exceeding board expectations.

That £23.9m contrasts (I think) to the £13.5m reported for H1. Bear in mind the resultant £10.4m for Q3 was aided by a £7.5m settlement revealed in November. And the £13.5m for H1 was supported by a £9.3m settlement. Progress last year was therefore dominated by two particular cases – cases that may have been unusually successful and not reflect the size and outcome of the vast majority of other investments. I’m guessing book value remains around £39m.

Perhaps this line has worried the market:

The Board will continue to closely monitor the evolving situation and the impact on anticipated levels of litigation finance enquiries in and beyond the near term, and the naturally needed conservatism to be applied to fair values of ongoing cases.

Will the fair-value accounting have to be revised downwards in light of recent developments?

MANO divides opinion. Its accounting differs to that of Litigation Capital Management (LIT) for example, which applies a more conservative cash-based approach to its bookkeeping.

Regardless of the accounting, investors in both MANO and LIT still have to derive a reasonable NAV to judge the respective valuations. From what I can tell, MANO’s fair-value accounting has been reasonably accurate to date. I have never looked at Burford Capital (just too complicated!), so I am not sure any of the doubts expressed by Muddy Waters apply at MANO.

I think MANO would be much more interesting if it ever trades at book – i.e. when the future investments are all priced in for nothing.

Anyway, ShareSoc provides the opportunity to sit in on a MANO webinar later this month. Should be worth attending to get a greater understanding of what is going on.

Any thoughts on MANO?

Maynard

Hi Maynard

I’ve attempted to produce a breakdown of Manolete’s more significant cases to try and get a feel for how concentrated their investment case values are. Your original article highlighted Manolete’s reliance on a small number of higher value cases:

“For some perspective, the annual report small-print revealed 174 ongoing cases, of which 29 (17%) represented investments totalling £24.5m (75% of the total investment portfolio).”

High value cases might be even more concentrated than that suggested above. At the time of the annual report Manolete’s balance sheet showed its total investment portfolio as:

Investments Value
Non-current £7.1m
Current £25.3m
Total £32.4m

The non-current investments are the longer term group of 22 ‘Cartel’ cases. The FY20 annual report says of these:

“The focus remains on the two particularly large Cartel Cases…The other cases are much smaller and therefore our valuation of the Cartel Cases as a group is solely based on the two much larger cases at this stage

If the 29 large value (>100k) cases cited in the annual report include the 2 Cartel cases then quite a large chunk (£7.1m) of the £24.5m assigned to them would come from just those 2 cases.

There is also some more detail on the values of individual cases in the FY20 presentation slides. The table on slide 16 lists the top 17 largest claims along with the corresponding fair values (excluding the Cartel cases and three other undisclosed cases). The top 5 cases (by fair value) total £8.12m in this table, the remaining 12 cases account for £2.85m (one of these is < 100k and wouldn’t be included in the 29 large cases so should be discounted). Based on this we can get the following breakdown of the 29 large cases:

Description No. Cases Fair Value Average Case value
Cartel cases 2 £7.14m £3.57m
Top 5 cases (excl. Cartel) 5 £8.12m £1.62m
Remaining cases > 100k from the top 17 11 £2.76m £0.25m
Others > 100k 8 £2.0m* £0.25m*
Undisclosed large cases 3 £4.48m £1.49m
Total 29 £24.5m £0.84m

* I have assumed that the 8 cases with values >100k but outside the top 17 have the same average value as the 11 cases that are in the top 17. In reality those 8 cases will likely have a lower average value.

The table above suggests that just 10 cases could be accounting for £19.7m ( 61% of the total portfolio value).

Recent Case Completions
Since the annual report there have been 2 significant case realisations. Both of these had much higher ROI (>1000%) than Manolete’s long term average of 174%. These two cases can be identified from updates to Manolete’s vintages table in their recent presentation slides which show them as being from the 2018 and 2019 vintages. In other words the two cases recently completed were included in the balance sheet of the FY20 annual report and so will have featured in the breakdown above. We can also identify the fair value that had been allocated to each case. In their latest presentation, Manolete stated that the significant case completion reported in H1 had fair value based on an expected settlement value of £5.5m. The subsequent RNS reporting the second significant completion stated:

“Manolete has now completed on a further important case today realising £2.8m net cash proceeds, in line with book value

With these two snippets of information we can identify the cases as the two largest cases in the previously mentioned table of Manolete’s most significant cases:

manolete-realised-cases-600


We can see that the significant case in H1 had an expected settlement value of £5.5m and associated fair value of £2.0m. (The case actually settled for £15m resulting in revenue recognition of £9.3m)

So, the top two high value cases (excl. Cartel and non-disclosed cases) will both be off the balance sheet in the next set of results.

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Hi MIA

Some super sleuthing there! Much appreciated.

Your calculations look right to me. I have taken your figures and worked out how things stand without the top two recent completions:

Description Cases Fair value £m
Cartel cases 2 7.14
Top 2 completions (excl. Cartel) 2 4.83
Top 3 outstanding (excl. Cartel) 3 3.29
Remaining cases > 100k from the top 17 11 2.76
Others >100k 8 2.00
Undisclosed large cases 3 4.48
Total 29 24.5
Others < 100k 145 7.9
Grand total 174 32.4
Cartel+Top 3+undisclosed 8 14.9
Grand total - Top 2 completions 172 27.6

Without the recent two large completions, the fair value of cases at the FY20 year-end was £27.6m – of which (I think!) the Cartel plus the top 3 outstanding cases plus the three undisclosed cases represented £14.9m.

So: 8 cases represented 54% of the investments excluding the two large completions. Agreed, a substantial dependency on a handful of cases! Not ideal. The questions now of course are how accurate will these 8 fair-value assumptions prove to be – and whether MANO’s future progress relies upon finding more cases with the same return potential as the top 8-10 cases.

Maynard

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Here’s a couple of observations on the ShareSoc presentation given by Manolete earlier this week:

The Pipeline Of New Cases Is Being Maintained
The table below compares new cases and case completions from H121 and H221 (so far).

Period New Cases Case Completions New Cases per Week Completions Per Week
H121 (26 wks) 110 52 4.2 2
H221 (19 wks to 12th Feb) 69 71 3.6 3.7

* H221 figures are calculated by taking those given in the YTD table on Slide 28 and subtracting the previously disclosed H1 figures. I have assumed the figures are correct up to 12th Feb as that is the cut off date used in the rest of the presentation.

In H1 the pipeline of new cases was growing at twice the rate of case completions. In H2 (so far) the number of completions per week has increased significantly (not sure how much control Manolete has over this figure - is it just a consequence of an increased number of live cases running their course?). The pipeline of new cases however has slowed to approximately the same level as the number of case completions, with the net result that the pipeline size is being maintained at its current level.

New Cases Have Not Dropped As Sharply As Underlying Insolvencies
Slide 20 in the latest presentation gives some comparative figures for underlying insolvencies (2019: 17225, 2020: 12557). I make that a 27% decline. The slide also indicates that there was a 4 month lag before the decline in insolvencies started to impact Manolete (there is also an additional lag of up to 3 weeks between an initial enquiry and signing of a new case). My interpretation is that the H1 results (to September 30th) were relatively unscathed but the impact is now being felt in H2. I think that interpretation also correlates with the RNS timings.

Referring back to the table above, the weekly rate of new cases being signed in H2 (3.6) has declined by approximately 14% compared with H1 (4.2). That looks slightly odd to me given there has been a much larger decline in underlying insolvencies. Digging a little bit deeper we can examine (to some extent) what the impact has been on new case enquiries.

I’ve reproduced the chart on slide 20 below which provides some information on the level of new enquiries during 2020 (Manolete’s FY21 began in Apr 20):


The 4 month lag from March previously mentioned can be seen in the chart with a decline in new enquiries starting from July. I’ve used this chart to extract the figures for the number of new case enquiries in H1:

H1 Apr May Jun Jul Aug Sep Total
No. Enquiries 57 58 71 62 47 39 334

The total number of H1 enquiries can also be derived from figures disclosed in the H1 results slides so I’m reasonably confident that it’s accurate.

What can we say about the number of enquiries in H2? This will be less precise but the chart shows new enquiries for Oct (H2 mth 1) at 40. Elsewhere in the presentation the figure for Dec is given as 45 and described as ‘pretty strong’(?). A figure for January is not given but is described as having started ‘very slowly’, so probably 40 at most and we have a figure of 21 for the first 2 weeks of Feb (based on the table on slide 24) which we can double up to 42. Given all of that I think a reasonable estimate would be 40 enquiries per month for figures that have not been disclosed for H2 (Nov & Jan) which gives us the following:

H2 Oct Nov Dec Jan Feb Mar Total
No. Enquiries 40 40 45 40 42 n/a 207

These estimates give an average of 55.7 enquiries per month for H1 and 41.4 enquiries per month for H2 (a decrease of almost 26%). That matches pretty well with the underlying decline in insolvencies. So why hasn’t the rate of new cases declined by a similar amount? The company says that it applies a strict acceptance criteria to new enquiries that results in only 30% being converted to new cases.

Here’s a breakdown of recent new enquiry conversion rates:

Reporting Period New Enquiries New Cases Conversion Rate
FY20 493 141 29%
Q121 186 47 25%
Q221 148 63 43%
H121 334 110 33%
H221 (to 12th Feb) 186 69 37%

* Q121 figures come from FY20 results slides. Q221 figures are derived from H121 - Q121
* H121 new enquiries from table above, new cases from H1 results slides
* H221 new enquiries from table above with half of Feb (21 enquiries) subtracted. New cases from slide 28 with H1 figures subtracted.

The increase in conversion rate between Q121 and Q221 (when new enquiries declined steeply) is quite striking and appears to have continued into H2.

Perhaps it’s just a statistical blip - the Q121 conversion rate is on the low side so Q221 might be expected to be a little higher and we might also be seeing an effect of the lag from new enquiry to case sign-up as enquiries sharply decreased in Q2 - the overall H121 figure is higher than FY20 but is perhaps not unusually high.

The H221 conversion rate does look higher (albeit with a potentially less precise estimate for new enquiries) . Perhaps recent enquiries have just been of higher quality resulting in an increased conversion rate? Or perhaps there is an element of a more relaxed case acceptance criteria in order to compensate for the decline in new enquiries…

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Great work again. Many thanks.

Just for reference:

Links to the ShareSoc webinar (member only):

Slides: MANO Manolete-presentation-170221.pdf (1.2 MB)

My two questions were both asked on the webinar:

Did not receive straight answers to fair-value alterations (paraphrased: ‘everything is always under review’) or significant case concentration (paraphrased: ‘disclosed top 17 in previous presentation’). The latter response was not assured and I formed the impression the posts on this topic are accurate and MANO therefore is/has been dependent on a handful of cases.

Another webinar takes place next week: Investegate |Manolete Partners Announcements | Manolete Partners: Investor Presentation

Maynard

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