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’ :
“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 £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?