IMF's result is roughly in line with expectations. Even the dividend is expected, having regard to their franking levels.
Nevertheless, there are substantial risks ahead- well, one substantial risk actually. The issue is pretty well covered by Alan Kohler on the Business Spectator website in May 2008.
The main opportunities ahead are concentrated in non-disclosure court actions. The company in its results presentation flagged a very important factor- funding for non-disclosure class actions cost a lot of money- we are talking $6m to $8m per action. In non-disclosure class actions, the critical issue is one between reliance and loss ie whether a litigant needs to prove that loss was actually caused by the non-disclosure. This is current law in Australia. IMF's court actions hinged critically on persuading the courts to develop the law by embracing the concept of fraud on the market ie once non-disclosure is proven, losses follow automatically without having to link them up.
In my opinion, this is a big ask in the legal circles.
Perversely, IMF does better to settle cases before judgment is handed down, rather than risks having a judgment where the court refuses to embrace the doctrine of fraud on the market, which will effectively make these class actions non-viable. The insurance company defendants will also prefer not to risks a court making a decision, and in their case, embracing the concept of fraud on the market will be disastrous for their current policies. However, the insurance companies are busily rewriting their policies to exclude this specific risk, so it is a matter of time before an insurer will push matters all the way.
Needless to say, lawyers will want to be part of a landmark case, so it is in the lawyers' interest to push the issue to obtain a court decision. As for litigant shareholders, inevitably there will be a group wanting to push matters all the way, since individually, the consequence of an adverse decision on each of them is rather small.
Therefore, the situation will fast approach a point where IMF will be forced to take matters to a full verdict. From an investment perspective, this is a major risk, given the costs and time involved in these actions. The pay-off could obviously be huge, but then, once a precedent is laid down, competition from other funders will increase in earnest.
So for the moment, it is vital to IMF not to risk a judgment on these non-disclosure class actions- it is a lose lose proposition. However, this situation will not last for long. How long? Well, the Aristocrat case is the closest to judgment, therefore 28 Aug 2008 is critical to IMF, and in my opinion, settlement is critical. The rest of the other class actions have some way to go before hearing- about 2 to 3 years on my estimation. In these 3 years, it is critical for IMF to settle all these actions, and also for other class action litigation to settle without a verdict.
If there are any readers, I would be grateful for comments.