Litigation Capital Manag... Share Discussion Threads

[gallamar] 04/4/2024 17:49

Maddox

Agree with everything you wrote. If you could imagine us having even 200m gbp in own capital in next few years. And assume a 2x multiple, taking market cap to 400m. Then share buy backs are good value.

I think they are signalling, making a good trade and also protecting us retail holders from the normal downward drift in prices on low volume.

As for lower returns going forward. We do not have to deploy huge amounta of capital relative to market size.

I think we can still cherry pick cases for a bit. When we are larger then it might be harder, but at that point we are all in profit so i do not worry so much about it

[maddox] 04/4/2024 12:57

The share buy-back is A$10m so not a huge impact on the B/S. Picking up the valuation point. As at 29 Feb 2024 the invested capital was circa. 100p a share. On a historic basis LIT have achieved a x2.8 return on invested capital. However, their aspiration is to hit a x4 return. Thus buying back shares will be highly advantageous for shareholders in the longer term - currently it flags to the market that the shares are under-valued.

[mtioc] 04/4/2024 09:55

DB, Not sure I agree. When buying anything, including your own shares, there is a sensible price and one that is not. The alternative potential uses of that capital are also relevant. If LCM can compound capital at over 70%, the share price needs to be attractive for a buyback to be a good use of capital.

Noted re facts etc.., but, for me, the purpose of the BB is to improve understanding rather than opine - too much of that elsewhere (e.g. Citywolf's excellent point re cash drag above that I had completely missed).

Glad it is simple and obvious to you, I suspect it is a bit more of a struggle for the rest of us!

[mtioc] 03/4/2024 10:26

Makinbuks/Gallamar

Thanks. Agree, nub is FV and associated risks. I also question LCM's ability to deploy more capital at same historical returns. My forecasts are for lower returns. In fund II LCM currently deploying at $8m/commitment. At that level will have over 40 commitments versus 20 in fund I. They will need to do something different (unit size, case type, geography etc..). That said, as an investor you need to value the business. In my case, if I believe it is conservatively valued at £2.50 per share, but due to risk of error, FV risk or uncertainty, I may choose a 40% margin of safety, which would suggest buying up to £1.50. My point is the company could be more helpful re investors reaching those conclusions. [G. not sure I follow your valuation approach.]

Note win rate point, but if there are proper forecasts, that is simply a variable that could be flexed (e.g. low, med and high cases).

Not sure LCM returns are as reliant on others for a few cases. See p9 of latest presentation for return distributions.

CEO trying to steer investors away from case news. With 53 investments and growing, it is a better appreciation of overall portfolio that will drive value rather than news flow.

On capital allocation, the amounts are small and the company is clear they are "market signals" rather than genuine capital allocation decisions. That said, if you have the internal investment opportunities that LCM does, you should be clear why you are preferring others such as buying your own shares or dividends. Again, I question the lack of explanation rather than the decision.

[gallamar] 03/4/2024 09:52

A persepective on the buy backs. If you could see this company having a valuation of 600m gbp in say 3 years. Buying stock at valuation of 125m gbp is nearly a 300 pct+ return.

We already have 30m gbp of cash. With over 30m gbp in cases over 3 years wr could easily soon have an extra 50m gbp of cash. If we cannot immediately invest it all, the share buy back is a very good trade

[gallamar] 03/4/2024 09:26

Onr thing that might help. If you worry about downside risk.

Think of a coin toss game. If you win you get 2.5 if you loose you pay 1.

If you simulate this even with a 70pct win rate it is very profitable. You may get some losses but the wins more that make up for them.

The decks did say 27m years ago. But that was before covid locked down the courts for 1 year. We also now invest in larger cases as we invest using 3rd party funds. The time factor imo is fine because performance fees double your returns.

I think share buy backs are great. It makes it safer to buy. In stocks with no buy back.the share price can drop 20pct on 30k of daily selling. Here it does not as the company scoops it all up!.

If you think in statistical terms of a coin toss this is a great business

[gallamar] 03/4/2024 09:21

I think you keep it simple.
Under 3rd party funds you would expect minimum 2x profit on cash( they quotas it doubles return on invested.

Take the 100gbp in cases now. Worst case think of this being 300 gbp in 3 years ( after a cycle). Ask what 300 of cash invested would be worth? X2. 600m.

The reality is they ask for minimum 2x return. Performance fees normally double that.

If they continue to build scale the operational costs will become less important.

[makinbuks] 03/4/2024 09:15

I fully agree with your final paragraph. Too many buy backs seem to me to be a response to the market rather than a proper capital allocation model.

Regarding your valuation, for me any exercise like this relies on the hope that future performance mirrors past experience. While the number of cases driving results per anum is so small the discount applied will always be large.

I don't fully agree with you on the boards transparency. I think time is drifting seriously from the first presentation I saw about three years ago when the slide deck promoted an average case time of 27 months.

I do agree the shares are good value at current levels

What we need is some positive case news

[mtioc] 03/4/2024 09:03

Over the last few days, I reviewed the latest LIT release and materials. In particular, the appendices of the last investor presentation provide an excellent summary of the firm’s current position. Parts have been presented before, but, as far as I am aware, not with summaries and durations. This is a tricky business to understand, but the team cannot be accused of being opaque.

This led me to reflect on my valuation. While inexact, I would discount my conservatively estimated future value to a present (net asset) value. I had a go, but this was nothing better than an electronic “back of an envelope,” which will inevitably have omissions and errors. My guestimate (lots of assumptions on assumptions etc.. so DYOR), after opex deductions, was broadly as follows:

• Deployed capital (own and 3rd party fee): £1.20/share (currently c. £0.9/share)
• Committed but not deployed (as above): £1.60/share (I included the whole of Fund II, which should be committed this year)
• “Expected̶1; capital (recycled LCM capital and Funds III and IV): £0.0/share (too speculative, but relevant to next point)
• Asset manager/LP: £0.3/share (Cost of hiring/retaining team in 3 jurisdictions, track record/reputation, proven “blue chip” fund raising ability. Others are struggling to replicate. This could be a material undervaluation)

The “Committed but not deployed” is possibly aggressive, but even if that was discounted/“chopped,” I suspect a medium sized private capital organization would pay £2.50 a share for LCM. If LCM remains “misunderstood” for a year or two longer, the management team and material shareholders might accept.

I would be interested in others’ views on valuation approaches, particularly re Burford. I think LCM differs, positively and negatively, due to scale, matter diversity, lack of US presence and narrower range of activities (e.g. no enforcement). Sometimes analysts have referred to multiples of NAV, which I do not understand. Litigation funders should all now have FV models, with cash flow for each investment, which could be adapted to provide projections, using pro-formas for future investments.

With apologies for repetition, but I do not think we should be guessing about how the management view their business’s intrinsic value. They are using shareholders’ funds to buy back shares, so they should articulate how they are valuing those purchases. This would include the prices at which they believe the shares are cheap and those that are too expensive, together with the basis of valuation. It is not enough to simply say the shares are "obviously cheap". Simon Wolfson (CEO of Next) is the best UK example of a clearly expressed buyback policy. They should also get their financial adviser to review and to publish their own valuation. Valuation clarity and guidance would do more to drive the share price than some other initiatives.

[nchanning] 02/4/2024 09:51

BUR's aggressive accounting of the Argentina case is essentially the reason why LIT trades at a modest valuation . A positive settlement for BUR might be the catalyst for the market accepting that fair value NAVs are reasonable and the spectacular returns genuine

[johnwig] 28/3/2024 10:29

LIT is still a small company and therefore somewhat under people's radar, but there is no visible limit to the company's prospects under the current rigorous but vigorous management. That's what counts!

[muffmitz] 27/3/2024 15:21

LIT is now looking a far better prospect than BUR with its pie-in-the-sky Argentinian "money".

[gallamar] 21/3/2024 15:22

I think ceo has commented on such things.

Many of the delays were due to courts shutting down for covid. Or just people arguing longer over bigger sums.

I would not read much into it

For example some arbitration cases like greenx take over 1 year to give answer after hearing. Just the way it is

[johnwig] 21/3/2024 15:12

I've had a good look at the LIT results and the attendant LITerature (good that eh?)and analysis and have come to this conclusion. The company is like a small chick, plump and thriving, with every chance of growing over time into, wait for it, an EMU! For the non-antipodeans amongst us, me too, appropriately the Emu is Australia's largest bird and probably the fastest. It eats and drinks intermittently when the opportunity arises taking on large quantities of water when it finds it in the arid Oz outback, just like in today's UK financial desert created by Boris,Truss, et al.

For the woman-hating posters on ADVFN, of which there are many, I also have good news. The male Emu's testicles swell to double their size during the two-month mating season, so there are hopes for you yet.....

[makinbuks] 21/3/2024 13:35

I have concerns that the older the case, the less likely you are to win. If the other side haven't settled after 4 years they must have equal belief in their position as you. That implies a win ration closer to 50% than the 90% achieved so far across the whole portfolio. Maybe the enhanced returns help compensate for this, but I'd be cautious in the modelling with assets older than 3 and certainly 4 years

[gallamar] 20/3/2024 16:01

We only have 45 mins, i will try and raise.

I think the key proposition is
1. We have 50gbp invested of own money
2. 50mgbp of cases are over 3yrs so we expect profits of say 100m gbp in couple of years.
3. If we invest even 100m gbp in 3rd party fund structure you would expect it could grow to 400m gbp on maturity.
4. On maturity company would be valued on multiple of cash invested 400*x.

The conviction comes from
1. They win 93pct of cases.
2. Investing 100m gbp is not huge amount
3. They are ultra picky taking 3pct of applications.

If you follow and like this story you like lcm.

They also have some downside protection.
1. Current nav at 90
2. Active buyback.

Any buyback at todays price may look like a steal if you think in few years it could be worth more than 4x current price

[mtioc] 20/3/2024 14:39

I think it is Simon Thompson. It appears to be a bit of confusing rehash of recent results and historicals that reiterates a previous tip. I am not big one for share price conspiracies, but I think it was Klement who did a nice piece that showed the biggest beneficiary of such tips were market makers.

It does refer to an Investec forecast. Gallamar, if you do speak to the team, could you find out who the broker is and what they are doing? LCM is quite difficult to understand and would benefit from sensible institutional coverage (ideally available on Research Tree).

[solonic] 20/3/2024 14:06

Apparently Investors Chronicle has come up with a very supportive note. Anybody know what they're saying?

[gallamar] 20/3/2024 13:42

Thanks for this

I will ask about the uncommited funds cost tom. I think we had a nice debt facility that had high rate but only kicked in when drawn. Ideal for such a scenario!

I think the 40m aud will be the class actions in aus. I will try and clarify, because we are not guaranteed MOIC on these.

Fully agree on general message. Once we move capital into 3rd party funds it is super.

Also massively lowers risk. If you make 4x when you win. You could loose a high percentage of cases and not loose your initial stake

[citywolf1] 20/3/2024 12:12

Hi all - a solid if relatively uneventful update. The key gamechanger in the short term is going to be getting this stubborn rump of old balance sheet cases realised. None shifted during this 1H period. $40m of them are held at cost and they are 4+ years old on avg, so most should be generating big returns if successful due to 'rising multiple over time' model.

It is powerful both because of the huge NAV uplift it could bring but also because of the significant balance sheet cash it frees up to accelerate investment alongside the funds. Overall we have $90m of commitments well over 3 years old now, so no reason why in the next 1-2 years we should not expect c.160m of profits to come from these if returns are in line with the long term track record. That would put a rocket ship under the share price.

Btw - one quite large 'hidden' cost that is made apparent in today's pres is the amount of commitments which go unitilised. This is effectively money which gets tied up for 3-5 years in reserves but generates zero return as it's never drawn. You can see on p12 of the pres that out of the 181m committed to date only 130m was ever deployed - quite a big cash drag.

Anyway, that's just a cost of doing business here and the returns more than make up for it. The leverage of the funds model is extraordinary (6x in F1 to date!) and combined with the very mature balance sheet cases means we should expect to see bumper cashflows in the next 12 months.

[boozey] 20/3/2024 12:08

I would be interested in L2B's comments who has been quiet in recent times....

[gallamar] 20/3/2024 11:32

Will do.

I want to clarify that really lit is a compounding story. 3rd party funds are a game changer giving 4x diversification and 2x returns.

If the presentation can make investors look more forward i think it is powerful.

I will also note the buy back benefits.
1. Stops people selling us down. They play with other stocks without buy back.
2. That we can use the buy back to really indicate the confidence of future nav.

I think we really have 3 navs.
1. Spot nav. 90p and think about items at cost being moic of 2. So 108
2. View current portfolio as if completes. So looking at moic on investment in own investments and funds
3. Have investors consider when we are transforming to say 90% vs 50% today.

The story should be of expecting 4x multiple on 90% of our reinvested funds

[williamcooper104] 20/3/2024 10:31

Yep I didn't like the buy backs But using cash that would have gone on a divi got a buyback is not weakening the balance sheet So better to just buyback Nobody is really buying this for the divi yield

[luweiluwei] 20/3/2024 09:51

Can you remind them of the tax drain on the dividend Gallamar.
Reinvesting or buybacks makes so much more sense.
If they were ever to move to London that would of course save a lot of tax drain on dividends as well.