OBL - Omni Bridgeway
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Re: IMF - IMF (Australia)
This is why I got into the stock. I was chatting about this with a lawyer friend of mine. He laid it out very simply, in almost every case a decent lawyer knows his chances of winning going into it. The other side does too and that's why they never go to trial because they already know what the outcome will be. Lawyers are some of the most risk averse people I know (if you've ever read a legal opinion, you'll know what I mean!). There's a misconception about the legal profession largely led by Hollywood stereotypes. The nice thing about IMF over SGH is that they don't need lots of expensive lawyers on their payroll.
Nutmeg said:
This is why I got into the stock. I was chatting about this with a lawyer friend of mine. He laid it out very simply, in almost every case a decent lawyer knows his chances of winning going into it. The other side does too and that's why they never go to trial because they already know what the outcome will be. Lawyers are some of the most risk averse people I know (if you've ever read a legal opinion, you'll know what I mean!). There's a misconception about the legal profession largely led by Hollywood stereotypes. The nice thing about IMF over SGH is that they don't need lots of expensive lawyers on their payroll.
Re: IMF - IMF (Australia)
I have just been listening to an interview given by Ralph Sutton, the guy heading up Bentham Capital, IMF's US subsidiary. Sutton gave a very informative overview of the US litigation funding market. If anyone is interested in gauging IMF's future prospects, you will find Sutton's overview worthwhile listening to:
http://www.brrmedia.com/event/89940/ralph-sutton-director-of-bentham-capital-llc
After listening to Sutton, it is hard to resist the conclusion that, at current prices, IMF is considerably undervalued with enormous upside and minimal downside. I say that because at around $1.35 per share IMF is trading over a forward P/E of 5. At that level, IMF's US adventure has not been factored in at all and yet the prospect for the US adventure to take off in a big way must be considered very high. This is because:
What is attractive about the US adventure is that the enormous potential that it offers can be leveraged of a tiny capex base. I don't expect that IMF's US business will result in the earnings being any less lumpy: they'll just be greater lumps. But you're right about lawyers knowing at a very early stage whether they are likely to succeed in the prosecution or defence of a claim. If a claim proceeds to trial, it is undoubtedly because settlement negotiations have broken down, and they have broken down because one side or the other thinks that it can do better at trial. The Uniloc litigation was an interesting example of this. Uniloc ultimately won with a massive award of damages at $US388 million. Microsoft appealed the decision and the award. It succeeded on the latter but settled with Uniloc before the quantum was redetermined. The problem appears to have been that at the trial the damages award was made by the jury after it was shown a pie chart by Uniloc's lawyers with $19 billion in revenue from the Windows XP operating system and some versions of Word (both of which were alleged to have infringed Uniloc's patent). Uniloc sought 2.9% of that total or about $564 million.
The Appeals Court ruled that the use of the $19 billion figure in front of the jury was improper as it was based upon a “rule of thumb” that 25 percent of a product’s value goes to the patent owner. However, I find it noteworthy that the Appeals Court did not disagree that the $US388 million award was in error but only that it was not apparent that the jury's award of a reasonable royalty base was tied to "the facts of the case at issue". I take it from that, therefore, that the sum at which Microsoft ultimately settled was probably only modestly better than the original award of $US388 million, since there was no guarantee that the original sum would not be re-confirmed or be assessed even higher.
I have just been listening to an interview given by Ralph Sutton, the guy heading up Bentham Capital, IMF's US subsidiary. Sutton gave a very informative overview of the US litigation funding market. If anyone is interested in gauging IMF's future prospects, you will find Sutton's overview worthwhile listening to:
http://www.brrmedia.com/event/89940/ralph-sutton-director-of-bentham-capital-llc
After listening to Sutton, it is hard to resist the conclusion that, at current prices, IMF is considerably undervalued with enormous upside and minimal downside. I say that because at around $1.35 per share IMF is trading over a forward P/E of 5. At that level, IMF's US adventure has not been factored in at all and yet the prospect for the US adventure to take off in a big way must be considered very high. This is because:
- the sheer size of the US litigation market is huge;
- yet relative to Australia, litigation funding is quite undeveloped in the US;
- while there are a couple of competitors in the US, there are not established players;
- settlement payouts in the US tend to be bigger (although so are the litigation costs);
- the US is the centre for patent infringement litigation which typically involves claims for enormous sums of money due to the mass production of computer hardware and downloadable software;
- the US is extremely litigious; and
- the legality in the US (unlike in Australia) of contingency fees, i.e. lawyers/funders taking a cut of settlements/judgment sums.
What is attractive about the US adventure is that the enormous potential that it offers can be leveraged of a tiny capex base. I don't expect that IMF's US business will result in the earnings being any less lumpy: they'll just be greater lumps. But you're right about lawyers knowing at a very early stage whether they are likely to succeed in the prosecution or defence of a claim. If a claim proceeds to trial, it is undoubtedly because settlement negotiations have broken down, and they have broken down because one side or the other thinks that it can do better at trial. The Uniloc litigation was an interesting example of this. Uniloc ultimately won with a massive award of damages at $US388 million. Microsoft appealed the decision and the award. It succeeded on the latter but settled with Uniloc before the quantum was redetermined. The problem appears to have been that at the trial the damages award was made by the jury after it was shown a pie chart by Uniloc's lawyers with $19 billion in revenue from the Windows XP operating system and some versions of Word (both of which were alleged to have infringed Uniloc's patent). Uniloc sought 2.9% of that total or about $564 million.
The Appeals Court ruled that the use of the $19 billion figure in front of the jury was improper as it was based upon a “rule of thumb” that 25 percent of a product’s value goes to the patent owner. However, I find it noteworthy that the Appeals Court did not disagree that the $US388 million award was in error but only that it was not apparent that the jury's award of a reasonable royalty base was tied to "the facts of the case at issue". I take it from that, therefore, that the sum at which Microsoft ultimately settled was probably only modestly better than the original award of $US388 million, since there was no guarantee that the original sum would not be re-confirmed or be assessed even higher.
Re: IMF - IMF (Australia)
When looking at businesses like this I try to separate profitability and cash flow. Profitable businesses can still have a liquidity event.
I don't think you can look at this stock in terms of price-earnings ratios because there is no reliable earnings stream. The only thing that you know for sure is their current case portfolio. Would it be possible to do some rough calculations as to how much they expect to receive from future settlements and discount them back to work out an NPV? You can't tell the exact timing, settlement proceeds, expenditure or success rate, but it might help as a guide. I would also suggest adjusting for whatever working capital is required.
When looking at businesses like this I try to separate profitability and cash flow. Profitable businesses can still have a liquidity event.
Re: IMF - IMF (Australia)
Agree in the main. I find it very hard to arrive at any medium term valuation of IMF. It appears to keep a very conservative balance sheet - conscious, no doubt, of the risk of a liquidity event. With the entry into the US and the size of that market, I suspect that it will begin to build up a case book to a point where it gradually has a sufficient number of cases settling over the course of the year and bringing in a stream of income but choppy income.
I think the valuation method that you put forward above would be an improvement but still subject to considerable limitations.
Agree in the main. I find it very hard to arrive at any medium term valuation of IMF. It appears to keep a very conservative balance sheet - conscious, no doubt, of the risk of a liquidity event. With the entry into the US and the size of that market, I suspect that it will begin to build up a case book to a point where it gradually has a sufficient number of cases settling over the course of the year and bringing in a stream of income but choppy income.
I think the valuation method that you put forward above would be an improvement but still subject to considerable limitations.
Re: IMF - IMF (Australia)
I agree with most of what you have said. Definitely limitations with the valuation model I suggested, but I do not see any other way you could attempt it without inviting even more potential inaccuracy and speculation!
I agree with most of what you have said. Definitely limitations with the valuation model I suggested, but I do not see any other way you could attempt it without inviting even more potential inaccuracy and speculation!
Re: IMF - IMF (Australia)
I once spent a bit of time trying to put a value on IMF, found the easiest way was to average out the dividends over the last 5 years then use a DDM. Discount rate 7.5% and dividend growth rate of 2%. IMF is about 30-40% undervalued - the question is does one have enough confidence in the business model and management over the medium term? I sort of do....never enough to allocate a large amount to it.
I have owned IMF and will again subject to a further drop in price.
I once spent a bit of time trying to put a value on IMF, found the easiest way was to average out the dividends over the last 5 years then use a DDM. Discount rate 7.5% and dividend growth rate of 2%. IMF is about 30-40% undervalued - the question is does one have enough confidence in the business model and management over the medium term? I sort of do....never enough to allocate a large amount to it.
I have owned IMF and will again subject to a further drop in price.
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Re: IMF - IMF (Australia)
A couple of points to remember and which I based a valuation on.
1. They maintain $70m in cash.
2. The case portfolio they disclose is not their total case portfolio it's only the cases where they have good reason to believe they will receive a payment. For instance the bank fees case is not included in their case portfolio, yet.
3. They generally receive between 25-40% of the payout. When you consider they have $1,600m portfolio with settlement time frames out to 2014, that's a fair chunk of change even after their own costs and discounting those payments.
I haven't attempted DCF or PE valuations because, as Vespuria said, I don't see how you can do it. What I do know is given their track record and the size of their disclosed portfolio, and the relative strength of their balance sheet I think this is a great company.
If you want an option on it, then you might want to look at IMFG. They're convertible notes (1-1) with a coupon of 10.25% FV $1.65 expiring Dec 2014. Redeemable at $1.65 at expiry, which gives you some downside protection.
A couple of points to remember and which I based a valuation on.
1. They maintain $70m in cash.
2. The case portfolio they disclose is not their total case portfolio it's only the cases where they have good reason to believe they will receive a payment. For instance the bank fees case is not included in their case portfolio, yet.
3. They generally receive between 25-40% of the payout. When you consider they have $1,600m portfolio with settlement time frames out to 2014, that's a fair chunk of change even after their own costs and discounting those payments.
I haven't attempted DCF or PE valuations because, as Vespuria said, I don't see how you can do it. What I do know is given their track record and the size of their disclosed portfolio, and the relative strength of their balance sheet I think this is a great company.
If you want an option on it, then you might want to look at IMFG. They're convertible notes (1-1) with a coupon of 10.25% FV $1.65 expiring Dec 2014. Redeemable at $1.65 at expiry, which gives you some downside protection.
Re: IMF - IMF (Australia)
IMF's management and business model are pretty solid in my view.
IMF's management and business model are pretty solid in my view.
Re: IMF - IMF (Australia)
I've always considered holding this - but it seems to have pretty big swings. Seems the $1.30 range is the lower end though...is it rangebound?
I read the investor presentation from February (anybody know if anything is available later?) and it seemed comparing HY2012 to HY2011:
- Gross Income, Net Income, NPAT, DPS and EPS all down
- Asset backing and case investment up
Can someone explain to me if case investment is up why the value of Investment Portfolio is flat? Am I to be reading it that the size of cases has changed?
This is very hard to value and thanks McLovin for pointing out that they don't include ALL cases as per their policy.
I've always considered holding this - but it seems to have pretty big swings. Seems the $1.30 range is the lower end though...is it rangebound?
I read the investor presentation from February (anybody know if anything is available later?) and it seemed comparing HY2012 to HY2011:
- Gross Income, Net Income, NPAT, DPS and EPS all down
- Asset backing and case investment up
Can someone explain to me if case investment is up why the value of Investment Portfolio is flat? Am I to be reading it that the size of cases has changed?
This is very hard to value and thanks McLovin for pointing out that they don't include ALL cases as per their policy.
Re: IMF - IMF (Australia)
I have a new portfolio rule - if the deal is not slapping me in the face i will not buy. The price is right but i am just not confident enough over the medium term this means the IMF deal is not slapping me in the face, so no buying yet. There is also a concern that IMF will never trade at value, always a bridesmaid and never the bride.
Just my
I have a new portfolio rule - if the deal is not slapping me in the face i will not buy. The price is right but i am just not confident enough over the medium term this means the IMF deal is not slapping me in the face, so no buying yet. There is also a concern that IMF will never trade at value, always a bridesmaid and never the bride.
Just my
skc
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Re: IMF - IMF (Australia)
7.5% is quite low, considering you can get that in some of the big4 hybrids? For IMF use no less than 12%, may be even 15%...
7.5% is quite low, considering you can get that in some of the big4 hybrids? For IMF use no less than 12%, may be even 15%...
Re: IMF - IMF (Australia)
Skc,
When I value a business I attempt to obtain a medium term valuation peg for the business to assist my thinking process. I use the medium term (future 5 years) as my focus, therefore my discount rate for a Dividend Discount Model is the 5 year term deposit rate + 2% equity risk. An assessment of earnings risk, valuation risk and financial risk is made to come up with % confidence. I then compare the discount to my medium term valuation peg to my % confidence. A large discount and high % confidence is a good deal. I think it is difficult to value IMF using PE or DCF, I therefore just use the dividend history as a guide to create a DDM to obtain a medium term valuation peg. I agree with many of the posters that IMF will be earning cash in the coming years, it is just lumpy and not visible.
An interesting exercise would be to obtain the dividend history from IMF, do some quick calculations using historical term deposits rates and then compare past valuations against share price over the recent years. I am confident that IMF spends most of its time trading at a discount to value due to the lack of earning visibility, as we all know the market does not like uncertainty – this is a key risk, my piggy bank is only going increase from dividends and capital growth during my desired investment timeframe.
If I was to use a valuation model for IMF, I would treat it as an LIC, focus on the difference in discount to a medium term valuation peg. Exploit the extremes and have an adequate investment timeframe.
Skc,
When I value a business I attempt to obtain a medium term valuation peg for the business to assist my thinking process. I use the medium term (future 5 years) as my focus, therefore my discount rate for a Dividend Discount Model is the 5 year term deposit rate + 2% equity risk. An assessment of earnings risk, valuation risk and financial risk is made to come up with % confidence. I then compare the discount to my medium term valuation peg to my % confidence. A large discount and high % confidence is a good deal. I think it is difficult to value IMF using PE or DCF, I therefore just use the dividend history as a guide to create a DDM to obtain a medium term valuation peg. I agree with many of the posters that IMF will be earning cash in the coming years, it is just lumpy and not visible.
An interesting exercise would be to obtain the dividend history from IMF, do some quick calculations using historical term deposits rates and then compare past valuations against share price over the recent years. I am confident that IMF spends most of its time trading at a discount to value due to the lack of earning visibility, as we all know the market does not like uncertainty – this is a key risk, my piggy bank is only going increase from dividends and capital growth during my desired investment timeframe.
If I was to use a valuation model for IMF, I would treat it as an LIC, focus on the difference in discount to a medium term valuation peg. Exploit the extremes and have an adequate investment timeframe.
Re: IMF - IMF (Australia)
IMF is ultimately a totally unique business - it has no peers offering comparison. But you're right that an LIC is probably the closest for comparative purposes that we will be able to find.
IMF is ultimately a totally unique business - it has no peers offering comparison. But you're right that an LIC is probably the closest for comparative purposes that we will be able to find.
Re: IMF - IMF (Australia)
The following article provides a broad investment case for IMF:
http://www.fool.com.au/2012/02/investing/imf-australia-limited-making-a-case/
The following article provides a broad investment case for IMF:
http://www.fool.com.au/2012/02/investing/imf-australia-limited-making-a-case/
Re: IMF - IMF (Australia)
I did some research last night and have to admit the DDM is the wrong valuation tool. IMF have only being paying dividends since 2007, there is not sufficient dividend history to make a valuation. I am in agreement with the posters about the future work and potential for growth but I am unable to obtain a basic medium term valuation peg. I am going to file IMF in the "too difficult" basket.
I did some research last night and have to admit the DDM is the wrong valuation tool. IMF have only being paying dividends since 2007, there is not sufficient dividend history to make a valuation. I am in agreement with the posters about the future work and potential for growth but I am unable to obtain a basic medium term valuation peg. I am going to file IMF in the "too difficult" basket.
skc
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Re: IMF - IMF (Australia)
Lol. That's the exact same basket I have it in. I think those who get it right will enjoy pretty good returns. But I struggle to understand The Good Wife on TV so I have no chance in understanding a lawyer business.
Lol. That's the exact same basket I have it in. I think those who get it right will enjoy pretty good returns. But I struggle to understand The Good Wife on TV so I have no chance in understanding a lawyer business.
skc
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Re: IMF - IMF (Australia)
It takes a wise man to make an honest assessment of himself.
It takes a wise man to make an honest assessment of himself.
Re: IMF - IMF (Australia)
I wish there were more stocks in that basket. It would mean that there would be more buying opportunities.
People used to say that they didn't understand MMS' business either. I didn't understand it initially but I understood its financials and that was all that mattered until I was able to come to grips with its business.
I wish there were more stocks in that basket. It would mean that there would be more buying opportunities.
People used to say that they didn't understand MMS' business either. I didn't understand it initially but I understood its financials and that was all that mattered until I was able to come to grips with its business.
