Monday, August 31, 2009

IMF a year on

Since I last wrote, IMF has moved to a high of $1.98. This was met by heavy a director, as it later turned out... and the reason given was that the shares were sold to fund a take up of a similar number of options. The sale pushed the price back to about $1.38, and at time of writing, the shares are at $1.57.

At 120 m shares, the market cap is $188 m. The company is in a stronger position, with funded claims of about $1 b. On 30 June 2009, it has 61 m of cash with no debt. It has since announced settlements which will boost cash by at least 20 m. Accounting for dividend payment in July, the company should have about 75 to 80 m in cash. It has since announced a buy-back.

My view is that IMF continues to be undervalued. The claim "book" I have estimated a probable value of about $150-200m. Add back cash, and we get $225m to $280 m, which equates to $1.88 to $2.30 per share, with the enterprise value as a free option. I would ascribe fair value to be about $2.00 to $2.50.

There has been no significant judgments or developments affecting the claims book. With an expected fully franked yield approaching 9%, I am only too happy to hold.

Thursday, April 23, 2009

Fast Track Cases

The Federal Court has just announced the commencement of a fast track case management system. It is expected that cases under fast track can be finalised within 5 to 8 months from the date of filing.

The positives are quite compelling. Commercial parties could now have a more reliable estimate as to the length of any litigation. Because of compressed time and regulated procedures minimising delays and pre-trial skirmishes, estimate of legal costs will be much more accurate. Certainty, or at least a reduction of uncertainty, will be very welcomed by commercial clients. My view is that every commercial dispute should be fast-tracked, or at least very closely case-managed. From my experience, the dynamics of commercial litigation is such that more often than not, one party benefits from delays, and that party is more often, but not always, the defendant. Think insurance companies, debtors, etc. I was recently in proceedings in the Supreme Court where my calculations arrived at the compelling conclusion that the defendant had a clear economic incentive to delay and fight without settling, since the legal costs (plus adverse costs orders) and interests on the amount claimed from the defendant does not exceed the funding costs of the defendant if that amount should be sourced externally from a bank (if any were available, such was the financing bottleneck during the subprime crisis). Therefore my client unwittingly became a financier!!

On an investment note, there are clear benefits to litigation funders, since one of the risks of litigation funding is that funds are tied up for such a long time waiting for a matter to go to trial.

Thursday, March 12, 2009

The End is Near

Perhaps it is due to irrational exuberance from the stock market bounce today. I came across two articles today which appear to indicate that the financial markets have hit rock bottom and is due for a turnaround. The first article is titled "The End of Economic Growth". The article suggests that perhaps we may be entering a critical phase where economic crash will merge with ecological crash, and 2008 may be the year of "the Great Disruption". This reminds me that we have gone through a "new paradigm" once in the 1980s with leveraged buyouts, and then again in the 1990s internet boom. My father-in-law tells me of his experience in the 1970s with rampant inflation, oil shock and gold prices, and the end of the world as everyone knew it, also a so-called "new paradigm". The doomsayers are out, and the end is near, a "new paradigm" is emerging, which signals to me BUY BUY BUY. The other article concerns Macquarie Bank written by a once staunch supporter who was bullish on the stock. Now he has thrown in the towel, and citing Charlie Munger to wit. Reminds me of James Cramer's story- the market bottoms when the most bullish of the bulls throw in the towel.

We'll see.

Making good leased premises

It is usual for leases to stipulate that at the end of the lease, the tenant has to make good and restore the premises to its state and condition at the commencement of the lease, fair wear and tear excepted.

Consider a lease with 5 years initial term and 5 years option, and the option has been exercised. When an option is exercised, a new lease comes into place. Therefore, at the expiry of the option lease, the tenant has to make good the premises and restore the premises to its state and condition at the commencement of the option lease, not the original lease.

There may be a big difference between condition of the premises at commencement of the original lease and the condition of the premises at the commencement of the option lease!!

For tenants, take pictures of the premises at commencement, even at option commencement date.

For landlords, keep pictures and records of the condition of premises at commencement. When an option is exercised, inspect the premises. Include a lease condition to ensure that all damage is made good before commencement of the option period, the failure of which will either void the tenant's right to exercise the option, or becomes a serious breach allowing landlord to terminate. Or perhaps draft the make good clause clearly to stipulate the exact condition in which the premises must be restored to (eg bare concrete shell), rather than making references to commencement dates.

This issue must also be considered by purchasers of lease properties, and also incoming tenants taking an assignment of lease. Get it wrong, and someone will spend millions making good, perhaps at the expense of their lawyer!

Tuesday, March 10, 2009

Can you use your leased premises?

Before committing to a lease of premises, a tenant should ensure that the premises can be used for the activity intended eg sale of fashion or accessories, restaurant, cafe, fitness centre, etc. Whilst a landlord or its agent may tell you that they are willing to lease to you for your intended business, lease documents usually contain a provision stating that the landlord cannot guarantee that a tenant can use the leased premises as intended. Restrictions may come from local council regulations, or there may be an inherent restriction on the title of the property, which even the landlord may not be aware of. Further restrictions may come from licensing authorities, such as liquor or gaming licensing, or pharmaceutical boards, and other governing authorities.

Emissions Trading Scheme in Australia

It appears that the government is hell-bent towards pushing this draft bill into legislation by June 2009. The scheme affects industries which are emission intensive, such as electricity companies, and also upstream vendors of fuel. The additional costs will no doubt be passed on to end consumers. The trading scheme allows purchase of emission credits overseas, but does not allow vice versa sale of local emission credits to overseas buyers. The scheme also allocates "free" units to the major polluters.

My first thoughts:

1. There is no incentive to reduce emissions, only a cost burden if emissions limits are exceeded. Such costs can easily be passed on to consumers, given the high barriers of entry to competitors. The target reduction of 5% below year 2000 levels by 2020 is ridiculously low. The compliance burden will be high, and a bonanza awaits advisors in this area. It is doubtful whether such activities actually brings significant real benefits to the economy. Given current economic conditions, it is surprising that so much time and effort is being spent on a matter which will increase burdens on businesses.

2. Clients in the property sector are not highly impacted. For example, air-conditioning emissions from buildings are not covered. Clients in the retail sector will have to prepare for higher energy and fuel costs. Clients in the investment sector will need to examine profit making opportunities in the trading scheme.