Litigation Capital Manag... Share Discussion Threads

[jackson83] 05/7/2023 14:16

BANK SOME / ALL THE SHIP IS ACTUALLY OK ALERT !! SINKING

maybe worry re high interest rates apply .

[jackson83] 05/7/2023 14:15

[PROFIT TAKERS CONTINUE ?

WITHOUT SOME NEWS this is going tank ? maybe see 65p / 72p again


I will rebuff then



PROBLEM IS INTEREST RATES ON THE UP so alarm bells RINGING NOW


NO NEWED NEED PANIC


MAYBR SEE 60P'S SOONER THAN LATER.L

[74tom] 04/7/2023 12:54

In my view it's evidence that a business can create tangible value that drives share price performance - that comes from investment returns + disciplined cost management, you have to have both over a consistent period of time in my view. If good returns get eaten up by bonuses or an expensive new office then the market won't reward top line performance.

As to Omni, I just can't understand why they've got 8 funds all with seemingly different, complex structures. Unless you know the specifics of each fund then you can't reconcile the balance sheet impact of each settlement. Have they simply been chasing EPV (Estimated Portfolio Value)? Which is a pumped up figure that appears to include the total value of the cases under management, unadjusted for the economic ownership of OBL / the Funds?

Where do you think LIT should be valued in comparison? If OBL were at £670m market cap last autumn having reported an equity loss of A$45m in FY22 on turnover of A$89m and will likely report an even bigger loss for FY23, surely LIT should be at least 25% of their pre crash market cap? I.e. a share price of £1.40. You could easily argue they should be at a higher ratio than that based on the performance metrics you posted & the fact LIT are far more leveraged to fund returns.

[pythian] 04/7/2023 12:45

That demonstrates very clearly that as things stand LIT is a much better prospect than BUR and presumably has no large Argentinian problem either...

[l2b] 04/7/2023 12:14

I agree Expenses management is important.
And Patrick has demonstrated that expenses will be tightly managed (including at a staff level).

But it's the business performance that is the engine power of share price performance.
And that's where LCM quality shines through.

Key metrics:
LCM has 97% win rate with overall 150% ROIC at 78% IRR.
OBL has only 76% win rate with overall 115% ROIC at 35% IRR (last 3 years).
BUR has 91% win rate with overall 92% ROIC at 30% IRR.

And LCM has the kicker of the 3PTY returns only starting - these numbers will only get juiced even further.
Then you reinvest at high rates of return and let operating leverage & compounding work its magic.

I also think LCM's accounting & fund structure demonstrates confidence in performance - they don't need to muck about.

OBL got rid of the CEO due to the downward trend in results but unfortunately it takes years to turn around culture & staff and then translate into $$$ results (cases alone take a couple years to play out on average).

[johnwig] 04/7/2023 10:10

Thank you very much for that clear and interesting analysis, 74tom.

[74tom] 04/7/2023 10:01

The final thoughts I had when comparing the two were around fund structure & fund timing. Having looked at Omni's funds, I'd argue LIT have negotiated the best structure I've seen. There is little doubt in my mind that Patrick has studied Omni in detail & fine tuned the terms so that the balance fairly rewards LIT's expertise whilst also being very attractive to investors. On a big win the split is near 50/50 and that is the way it should be in my view.

On timing, Omni raised a huge amount of fund AUM in a very short space of time from ~2016-2019. This meant that they had a huge amount of cases to source / fund & then a lengthy gap before any 'harvesting' could take place, accentuated of course by Covid. LIT have so far taken a more restrained approach, and already cash from their first 3 cases in Fund 1 (A$53.1m) has nearly satisfied the A$56.25m of Fund 1 deployment that is required. Further Fund 1 settlements can go towards Fund 2, overheads & balance sheet strength. Then once Fund 2 is substantially deployed, they can start on Fund 3 (Patrick said in March that Fund 3 would potentially be $500m in size & they would start the round in 12-18 months, so mid 2024).

So overall, I think the excellent overhead management, superior fund structure, relatively simple balance sheet & disciplined fund scale up sets LIT apart from Omni. Omni were a £650m market cap last autumn, given the above I see little reason that LIT can't move towards this level of valuation over the coming years.

[74tom] 04/7/2023 10:01

Now onto the interesting part re. share price; Omni reported a loss of A$30m in their half year report, which caused their shares to plunge from the A$4 range to just over A$2, indeed they were closer to A$5 most of last autumn. The market knew there were court delays & that overheads were high, but still held the shares up until the results were officially released.

They are still valued at £390m & from looking through their latest quarterly portfolio report they have an estimated ~A$1.1b in settlements due over the next 3 years. Of course, this has to be offset against the A$100m annual overhead bill.

LIT with it's annual overhead bill of A$15m is clearly far more geared to settlement returns than Omni, and the market will be left in no doubt of that fact when the trading update & results are released.

[74tom] 04/7/2023 10:00

Fair post Maddox, I'll retract yesterday's comments on fair value - they were borne purely out of frustration as to why the recent terrific newsflow is still being sold into.

I also had a dig into ASX listed Omni Bridgeway last night & wow, what a mess. Very interesting though. The CEO resigned in Feb, their overheads are huge & they have around 8 funds which all have different structures, meaning it's nearly impossible to unpick their balance sheet & RNS announcements.

Their latest fund was announced last year; €30m contribution from Omni's balance sheet with €270m as limited recourse debt, which they then paid $29m to insure in case they can't repay it... the first €270m of fund settlements go towards paying off the debt and then the remainder flow to Omni - an utterly bizarre way to structure a fund IMO, especially with high inflation, but they think it will reduce their overall cost of capital...

There are several fundamental differences to LIT, however the key one IMO is level of overhead spend.

In their half year report to 31/12 their employee benefits cost was A$39m, with a further A$14m of office/other overhead spend. This compares to LIT who reported just A$4.7m in employee costs & a further $2.5m corporate overheads. LIT is a lean operation & as such has been able to navigate the global court system delays with relative ease. A 1 year delay cost us ~A$15m whereas the same delay cost Omni ~A$105m, yes they are a bigger beast, but that is still a huge difference.

[maddox] 03/7/2023 10:55

As a very close follower of BUR - I can see little value in fair value accounting. The in-flight cases are held at a fair value that isn't a reflection of their true worth and investors don't seem to trust the figures in any case. So, a share-price uplift is a vain hope. Putting FV through the P&L just adds huge complexity - especially if you incorporate a discount rate(additional interest rate volatility).

Keep the P&L and B/S simple and rns the case outcomes - I think LIT have come-up with the correct approach to keeping shareholders informed.

[74tom] 03/7/2023 10:14

Agreed, it's almost certainly irrational to sell right now unless you are either a forced seller due to fund outflows. If someone is trading with an emotional agenda then it will almost certainly prove costly.

One way to blow anyone out of the water would be to switch to valuing cases at FV, as per listed peers Burford, Manolete & Omni Bridgeway. I know it's been discussed ad infinitum on here before but there must surely come a point when the board run out of patience with the apparent level of undervaluation / they become it real risk of a hostile takeover?

One element of any switch I don't fully understand is whether there would be any impact on income tax in the year any NAV uplift was applied or whether the gain would be recognised below the tax line pending settlement?

[johnwig] 03/7/2023 08:57

74tom, the unavoidable truth currently is that LIT is still a "small" share. In other words it doesn't take very deep pockets to depress the price quite significantly. This, of course, applies to a myriad other shares on the drippy UK market.

Obviously I think it's crazy to sell LIT at this particular moment for the reasons that you so clearly describe but one never knows what convoluted, possibly deranged, plans the seller has in mind. Probably won't be long now, though........

[74tom] 03/7/2023 08:37

The constant downward pressure on the sell side continues here - around 500k shares have been sold in the last week to blunt the rise & now send it into reverse, including over 100k in the first 10 mins today. The common tactic is to load the offer with sells pre open & then leave an iceberg sell on the order book during the day to absorb any buying. Thurs & Fri saw around 300k shares bought at ~84p but the seller just kept reloading.

The key question is why would anyone sell when LIT are on the verge of announcing a record half year performance? And a huge record at that... Plus at least 2 case announcements are imminent in PFAS & Rabah, which will mean H124 gets off to a flyer too.

I've long suspected that some of the selling is personal, but where are the shares coming from? There are no disclosed shorts and it would only need a 595k short position to breach the 0.5% disclosure threshold...

Whatever the case, given the diversification in capital commitments, success rate, 11 year ROIC of 163%, huge growth in AUM & dramatic improvement in financial position I can't see any reason that this won't break out in the coming months. I'd also add that they've made some impressive looking senior hires this year, several of which have come from competitors.

[74tom] 29/6/2023 10:55

I'd agree with that someuwin. Certainly a £500m market cap wouldn't look expensive if the market was to price in deployed capital continuing to produce ROIC's in excess of their 11 year average of 163%...

I've crunched as many numbers as possible in the last week & come to the conclusion that this is now grossly undervalued.

It's no wonder the chairman has been buying hand over fist for the last 18 months...

[someuwin] 29/6/2023 10:00

I think LIT is now where BUR was at the start of 2016. Beginning a major, multi year growth phase which could see a similar 10 x multi-bag to $bn+ levels.

[l2b] 28/6/2023 18:54

Update to LCM v Rabah Enterprises - the purchased case from a liquidator.
Interest now added bringing total sum up to $20.2m
www8.austlii.edu.au/cgi-bin/sign.cgi/au/cases/nsw/NSWSC/2023/722

LCM share is 85% (remaining 15% to liquidator).
It's unclear if direct or 3PTY - no announcement as yet.

[makinbuks] 22/6/2023 14:02

The debt may not even be repayable early or if it is there will be charges or a penalty. I would imagine the lender wouldn't want LTM to have the option to get out of paying him his performance element

[l2b] 22/6/2023 13:36

It's an interesting (and welcome) discussion on capital allocation.
Does one prefer:
- Dividends or BBs
- Debt repayment
- Full reinvestment
- a combo of the above

For me, one always looks to full reinvestment option first.
Companies that have the ability to compound returns LT at high rates are the biggest winners.
LCM's average annual IRR is 79% (pre-OPEX & tax). I don't know what that would look like at a NPAT level given that the company is in the early stages but at maturity that has potential to grow to a significant ROE (e.g. FY18 was 30% ROE - the last result pre-ramp of 3P Funds model and came from DM returns only). Maybe a 40% or 50% or whatever is possible?
And they have they have the ability to reinvest comfortably - given the recent results Passive Funds will be banging the door down to give them money to invest at will.
So why not max out the capital investment opportunity?
Why pay down the debt (only costing ~13% or so) or pay divies? As an Aussie the franking is handy but I get ff divies from other investments.
So reinvest fully, juice this bad boy up - could be a 30-50x (over a few years) from here if they continue to execute and compound returns.

Ultimately, I have my preference but also have no issue with either strategy.
It's a good problem to have.
Hope the LCM team keep banging out the wins.
As at Feb-23 there was $201m to be committed in the 12 months from that date => plenty of more action to come so hang on to your hats!

[74tom] 22/6/2023 13:15

Ps. A couple of further points on the loan, here is the detail;

"The Credit Facility, which is secured against LCM's assets, is available for general corporate purposes, and has an overall term of four years. The coupon comprises a LIBOR based rate of 8% per annum together with a profit participation calculated by reference to the profitability of LCM's direct investments. In all circumstances, the overall cost of the facility is capped at 13% per annum."

- An 8% coupon now looks extremely competitive given SONIA is >5%, all small cap borrowers will pay a significant fee on top of this (i.e. Molten Ventures is SONIA + 5.5%)

- The 13% rate is a combination of SONIA + up to a 5% profit participation in direct investments

- It was only available for drawdown in the first 2 years, ending 22/02/23

Last one from me until the next announcement - hopefully we get another settlement pre year end, but if not it'll be the July market update.

[74tom] 22/6/2023 12:56

Hmm. That's an extremely negative stance given this weeks newsflow. The gross debt balance was just A$56m at 31/12 and the last 2 announcements alone will see A$43.5m in cash inflows. There is zero reason to expect any further drawdowns.

Further, they didn't draw down in H123, despite revenues of just A$4M. Gross debt at 30/06/22 was A$54.9m and at 31/12/22 it was $56m.

And no, it's not a sop to investors who think a dividend is 'nice' there are plenty of UK based income funds that can't hold shares if they don't pay a dividend. It was the main reason Premier Miton sold LIT down in late 2020 to just 53p. Oh and BUR also pay a small dividend - likely for exactly the same reason.

In 3 months we'll have a clearer picture of exactly where the balance sheet stands, however there is no doubt that recent inflows will have been fairly transformational to NAV.

[nchanning] 22/6/2023 12:25

Yes it doesn't really matter when we're talking about a £1 million dividend but its fundamentally irrational when achieving such high returns on capital with plentiful investment opportunities without any need for further increases in central costs . Most likely Lit will be drawing down on a debt facility again in future and paying up to 13% interest to pay this dividend . It's just a sop to investors who think a dividend is nice , not a rational capital allocation decision

[74tom] 22/6/2023 11:37

Those items don't need to be mutually exclusive? A good capital allocation policy should balance debt repayment, reinvestment in the business & capital returns to shareholders.

They paid a dividend of A$1.3c in their only full year on LSE before covid hit. A 1p dividend would only cost them £1.2m & would be more of a statement of intent than anything else. It would attract new investors & flag that the balance sheet & outlook was healthy again.

Sure, put the vast majority of the A$78m YTD settlements + A$30m+ of confirmed pending settlements into reducing the debt & funding new cases, however given the LIT balance sheet requirement for matching the entire Fund II value of USD300 is ~A$110m, of which some has already been committed, I don't see how paying out a small dividend would cause any problems.

Interested to see what others think, however I remember some time ago quite a few were keen for a divi to return.

[nchanning] 22/6/2023 11:02

There are still a lot of commitments due from Lits only balance sheet for Fund 2 , the debt was very expensive , and the returns on invested capital are outstanding . So better to reinvest the cash than pay a dividend for me

[74tom] 22/6/2023 10:14

At 31/12 gross debt stood at A$56m, with cash of A$33m, so net debt of A$23m

I have total cash of A$78m returning to LIT from the 5 settled investments reported in H2;

A$11.5m from today's RNS
A$32m from Monday's RNS
A$12.5m from Comet
A$14m from the March class action win
A$8.6m from Carillion

I make the gross profit on the above A$60.75m, assume H1 overheads of A$12m and corp tax of 30% and you get H2 PAT of A$33.6m.

We then have the PFAS settleent of ~A$16m to LIT at 50/50 fund split, plus Rabah A$14.8m+ assuming it's direct, plus Lynchpin as confirmed wins. Plus another 20+ in the pipeline.

Bottom line, the recent wins should comfortably put the company in a net cash position & surely means dividend's are back on the table?