I regularly re-examine my past investments. I look at moves where I lost money. I try to determine where a mistake was made. Trust me, it has always been mistakes, not bad luck.
I also look at winners. I have found that with winners, the value was very obvious. I did not have to sweat it. I did not even need a back of envelope calculation. In fact, when I found value, I usually have to do a quick re-check to make sure I have not made any mistakes.
Here are some examples:
IMF- I have explained this in previous posts. Just to recap, I found this in July 2008 trading at $82m market cap. It has just won the Aristocrat case, and the proceeds of that case would see IMF's net cash at $68m. I was paying $14m for a $1 billion case portfolio. Since then, IMF has paid dividends in excess of $82m, if you account for the imputation credits ie I have already covered my purchase price from dividends alone.
ASW- I found this in June 2009 trading at a market cap of $16m, with no debt and nearly $4m in cash. Cashflow exceeded $1m per annum, and it was growing from a small base, and paying a dividend. Market cap eventually flew to $40m, and this investment was sold as a 2.5 bagger in about 20 months.
EPY- in March 2011, this had a market cap of $7.2m. Its net current assets totalled $13.5m, and cash stood at $12.5m. A bidding war ensued, and this investment was sold for 48% gain in 6 months. The sale may have been a mistake, as the company has paid $4.6m return of capital since then and is still trading at $7.2m.
UOS- in Feb 2011, this had a market cap of $330m. With very little debt, investment properties on the balance sheet already totalled $433m. Within a year, the company floated a subsidiary on the KLSE and returned $80m in capital plus $20m in dividends to shareholders. Currently trading at $400m, this investment has returned 42% in capital returns and dividends within 2.5 years.
CTE- in April 2012, this had a market cap of $7.3m. It had no debt, had cash of $3.5m on the balance sheet, and management had just announced full year earnings update of $1m. Backing out cash, this was trading at a PE of 3.8. As at the date of this post, CTE is trading at market cap of $16.5m, with $4.5m of cash on the balance sheet. A satisfactory 133% return in 6 months is not too shabby.
As you can see, the value was very obvious in all of these cases. Yet someone was selling shares to me.
Now, a word of caution. I do not believe in absolutes, as there are always exceptions. At the time of writing, there are two companies looking very cheap at first glance. Firstly, RIS is trading below cash. Secondly, SSL is trading at half the value of its net assets. In both cases, unlike the above winners, I am not confident at all that the value will be realised in the hands of minority shareholders.
Disclaimer: the contents of this post is not to be relied on as financial advice. It contains my personal opinion only, plus facts that I cannot verify to be accurate. Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.
Showing posts with label IMF. Show all posts
Showing posts with label IMF. Show all posts
Sunday, November 4, 2012
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.
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.
Tuesday, September 30, 2008
IMF cash bank
IMF informed the market on 30 September 2008 that it has $83m in the bank. We need to subtract $6m for the impending dividend payout. So it has $77m in the bank, and assuming 120m shares on issue, then cash backing is 64 cents per share. Current share price of 85 cents implies $102m market capitalisation.
So the market is saying that the business is worth $25m (once you back out the cash). Realistically, IMF will have at least $10m per year in revenue, and on assumption that its fixed and recurring costs is $4m to $5m per year, IMF earns at least $5m per year before tax. The current business valuation price is at 5 to 6 multiples, which is akin to early start up valuations.
The market is not wrong, just unwilling to pay higher multiples for this business. Looks like Rob Ferguson will just have to work harder on this lumpy earnings beast.
So the market is saying that the business is worth $25m (once you back out the cash). Realistically, IMF will have at least $10m per year in revenue, and on assumption that its fixed and recurring costs is $4m to $5m per year, IMF earns at least $5m per year before tax. The current business valuation price is at 5 to 6 multiples, which is akin to early start up valuations.
The market is not wrong, just unwilling to pay higher multiples for this business. Looks like Rob Ferguson will just have to work harder on this lumpy earnings beast.
Thursday, September 4, 2008
IMF "panning" out
Further to my previous posts on IMF, things appear to be proceeding according to plan. The Aristocrat settlement has been approved by the court. Given that this is more or less already anticipated, it is still surprising to see a surge in the share price to 80 cents briefly. The price has now stabilised at about 76 cents.
Today, a further funding agreement for a case against the Federal government has been announced concerning the Pan Pharmaceuticals affair. Given the $50m settlement with Jim Selim CEO, albeit on a without admission basis, it is difficult to see how the Federal government can avoid liability.
There is also news today of possible multiple actions by councils against Lehmann in respect of investments in CDOs and losses being suffered from the subprime crisis. This has been a pet project of IMF Hugh McLernon. I believe the chances of further funding agreements on CDO losses related matters are fairly high.
Currently, IMF is sitting on cash estimated at $80 million, which is about 66 cents per share. Market cap is 91.2 m, therefore, the business is being valued at $11.2 m for a portfolio of cases with maximum value claim of over $1 billion. The market appears to be saying that IMF will only squeeze 1% out of its portfolio.
This is still within Ben Graham region, with no regard to a defensive business in a monopolistic position in a growing market.
As per previous post, watch out for court judgments.
Today, a further funding agreement for a case against the Federal government has been announced concerning the Pan Pharmaceuticals affair. Given the $50m settlement with Jim Selim CEO, albeit on a without admission basis, it is difficult to see how the Federal government can avoid liability.
There is also news today of possible multiple actions by councils against Lehmann in respect of investments in CDOs and losses being suffered from the subprime crisis. This has been a pet project of IMF Hugh McLernon. I believe the chances of further funding agreements on CDO losses related matters are fairly high.
Currently, IMF is sitting on cash estimated at $80 million, which is about 66 cents per share. Market cap is 91.2 m, therefore, the business is being valued at $11.2 m for a portfolio of cases with maximum value claim of over $1 billion. The market appears to be saying that IMF will only squeeze 1% out of its portfolio.
This is still within Ben Graham region, with no regard to a defensive business in a monopolistic position in a growing market.
As per previous post, watch out for court judgments.
Monday, August 25, 2008
IMF does not want a judgment
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.
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.
Saturday, August 16, 2008
IMF follow up (I)
Further to my IMF long idea.
As at 17 August 2008, I note unusual activity in the stock with lots of off-market trades. The market is still waiting for confirmation by IMF of the Aristocrat setlement.
On the business front, the Federal Government has paid $50 m to Jim Selim, former CEO of Pan Pharm, in settlement of a lawsuit where Selim is alleging that the TGA wrongfully cancelled Pan Pharm's license. Readers should note that the pulling of this license probably caused the liquidation of Pan Pharm, which had a market cap of about $250 m. It also resulted in the loss of 400 jobs, plus a whole lot of losses to suppliers and customers.
I am waiting for news of massive class actions being launched against the Federal Govt, and inevitably, some of this will be funded by IMF.
As at 17 August 2008, I note unusual activity in the stock with lots of off-market trades. The market is still waiting for confirmation by IMF of the Aristocrat setlement.
On the business front, the Federal Government has paid $50 m to Jim Selim, former CEO of Pan Pharm, in settlement of a lawsuit where Selim is alleging that the TGA wrongfully cancelled Pan Pharm's license. Readers should note that the pulling of this license probably caused the liquidation of Pan Pharm, which had a market cap of about $250 m. It also resulted in the loss of 400 jobs, plus a whole lot of losses to suppliers and customers.
I am waiting for news of massive class actions being launched against the Federal Govt, and inevitably, some of this will be funded by IMF.
Tuesday, July 22, 2008
Shark Prime
Well, I am long IMF now. Not the IMF that all readers may be familiar with. IMF is a company listed on the Australian Stock Exchange. It makes money by funding large scale litigation and taking a nice big slice (bite) of the proceeds.
This "loan shark" company is run by lawyers and bankers- what a match. Management has a sizable stake, and looks like the company is in the right place at the right time with a few spectacular near corporate collapses in the market, and by my reckoning, quite a few to come.
There is some $42m in the bank and no debts, the company redeeming all of its convertible notes recently. It has 120 m shares on issue, so we have cash backing of about 35 cents per share. Looking at getting a further $37 m by August if the Court approves the settlement deal with the poker machine giant Aristocrat. I do not see why the Court will stand in the way. So that adds another 31 cents for cash backing, and voila, we have 66 cents per share. The shares last traded at 68 cents. We have 2 cents per share for ongoing enterprise value
So, for a measly A$240,000, you get to own a portfolio of over 28 pieces of funded cases. Ok, just for clarity, current market cap is $82m, cash and expected cash by August is $79 m. So about $300,000 for enterprise value being ascribed by Mr Market at the time I write.
Let's see, from 2003 to 2008, the company funded about 29 cases which have concluded. They lost or withdrew from 10, but settled or won 19, so about 2 to 1 ratio. Over the same period, it spent $23m and recovered $77m. Past performance is no indication of future performance of course. But the industry mechanics are favourable. Consider this, the cost of litigation has gone up steadily over the years, but not quite nearly as much as the market capitalisation of all listed stocks, in strict dollar terms. Claim sizes based on stock market losses (or gains) as compared to litigation costs will rise on a near exponential basis. So in bald terms, for every dollar punted by IMF, it sees increasing returns in real dollar terms. It is like a company selling a product which has a ratchet price increase build in- much like cigarettes and petrol in Australia. Perhaps a comparison of the case portfolio and recoveries over the last few years will illustrate this concept.
There are competitors in the market obviously, but IMF should remain top dog for quite a while. Two main reasons, first is size. The court system in Australia punishes losing litigants by making them pay a portion of the legal costs of the winning party. Another peculiarity is that the court also ensures that winning litigants are not out of pocket for such legal costs against a losing litigant, by making plaintiffs provide security for costs. Therefore, balance sheet size matters, because not only is the litigation funder such as IMF required to pay the plaintiff's own legal bills, it has to provide a bank guarantee for the other side's legal bills in case it loses. In a multimillion dollar claim, legal costs could exceed several million. Multiply that over a portfolio of 30 cases.
Second reason is that it is not just a question of deep pockets that makes this business successful. You have to pick your cases well. IMF loses money not only if it loses the case, but also if the case drags on for several years without a verdict. The quality of your portfolio is essential. And also you need to have a sizable portfolio to smooth out results. And there is a virtuous cycle at work. Because IMF is choosy and picky over its cases (plus it has an investigative arm to fund investigations into a case), potential litigants and their lawyers will approach IMF for funding purposes first, because if it is approved by IMF, chances are you have a near sure winner. I think of this concept as being the case of "the fish that John West rejects."
Well, let's see. Time will tell. I believe that by year end, cash in bank for IMF net of loans will exceed market cap. Pure dirty "Ben Graham" play with a bit of Fischer upside. You got to love that.
This "loan shark" company is run by lawyers and bankers- what a match. Management has a sizable stake, and looks like the company is in the right place at the right time with a few spectacular near corporate collapses in the market, and by my reckoning, quite a few to come.
There is some $42m in the bank and no debts, the company redeeming all of its convertible notes recently. It has 120 m shares on issue, so we have cash backing of about 35 cents per share. Looking at getting a further $37 m by August if the Court approves the settlement deal with the poker machine giant Aristocrat. I do not see why the Court will stand in the way. So that adds another 31 cents for cash backing, and voila, we have 66 cents per share. The shares last traded at 68 cents. We have 2 cents per share for ongoing enterprise value
So, for a measly A$240,000, you get to own a portfolio of over 28 pieces of funded cases. Ok, just for clarity, current market cap is $82m, cash and expected cash by August is $79 m. So about $300,000 for enterprise value being ascribed by Mr Market at the time I write.
Let's see, from 2003 to 2008, the company funded about 29 cases which have concluded. They lost or withdrew from 10, but settled or won 19, so about 2 to 1 ratio. Over the same period, it spent $23m and recovered $77m. Past performance is no indication of future performance of course. But the industry mechanics are favourable. Consider this, the cost of litigation has gone up steadily over the years, but not quite nearly as much as the market capitalisation of all listed stocks, in strict dollar terms. Claim sizes based on stock market losses (or gains) as compared to litigation costs will rise on a near exponential basis. So in bald terms, for every dollar punted by IMF, it sees increasing returns in real dollar terms. It is like a company selling a product which has a ratchet price increase build in- much like cigarettes and petrol in Australia. Perhaps a comparison of the case portfolio and recoveries over the last few years will illustrate this concept.
There are competitors in the market obviously, but IMF should remain top dog for quite a while. Two main reasons, first is size. The court system in Australia punishes losing litigants by making them pay a portion of the legal costs of the winning party. Another peculiarity is that the court also ensures that winning litigants are not out of pocket for such legal costs against a losing litigant, by making plaintiffs provide security for costs. Therefore, balance sheet size matters, because not only is the litigation funder such as IMF required to pay the plaintiff's own legal bills, it has to provide a bank guarantee for the other side's legal bills in case it loses. In a multimillion dollar claim, legal costs could exceed several million. Multiply that over a portfolio of 30 cases.
Second reason is that it is not just a question of deep pockets that makes this business successful. You have to pick your cases well. IMF loses money not only if it loses the case, but also if the case drags on for several years without a verdict. The quality of your portfolio is essential. And also you need to have a sizable portfolio to smooth out results. And there is a virtuous cycle at work. Because IMF is choosy and picky over its cases (plus it has an investigative arm to fund investigations into a case), potential litigants and their lawyers will approach IMF for funding purposes first, because if it is approved by IMF, chances are you have a near sure winner. I think of this concept as being the case of "the fish that John West rejects."
Well, let's see. Time will tell. I believe that by year end, cash in bank for IMF net of loans will exceed market cap. Pure dirty "Ben Graham" play with a bit of Fischer upside. You got to love that.
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