OBL - Omni Bridgeway

[Rainman]

I read the Federal Court judgment of the Full Court in the Bank Fees case. Chief Justice Allsop wrote the leading judgment. My view is that the basis on which the Full Court allowed ANZ's appeal is correct and that it will be upheld by the High Court. For that reason, I think the Bank Fees' case is going to be one of IMF's losers.

I remain long IMF and have recently started adding to my position. However, I am going to keep some powder dry because, if, as I expect, IMF's appeal to the High Court fails, its share price may dip down a little further following the High Court appeal.

 

[Rainman]

At a market cap of $300 million (and with $128 mill in cash), I think IMF is trading very cheaply at the moment.

I agree with that. I worked out the other day that IMF has a present earnings yield of 13% based on its average earnings for the past 5 years. If you factor in the dividends that it pays, that is a yield of well over 15%.

 

[herzy]

I agree with that. I worked out the other day that IMF has a present earnings yield of 13% based on its average earnings for the past 5 years. If you factor in the dividends that it pays, that is a yield of well over 15%.

Yep, plus lots of positive signs from their expansions into the US. HK and EU seem to be going ok too.

I think this Bank Fees case is providing a good opportunity to find a very low entry point.

 

[Wysiwyg]

Yep, plus lots of positive signs from their expansions into the US. HK and EU seem to be going ok too.

I think this Bank Fees case is providing a good opportunity to find a very low entry point.

How are they managing in Hong Kong? There notice indicates a third investment there and a spike from the relentless down trend.

 

[skc]

I agree with that. I worked out the other day that IMF has a present earnings yield of 13% based on its average earnings for the past 5 years. If you factor in the dividends that it pays, that is a yield of well over 15%.

Are you sure? IMF P&L over last 5 (and a half) years

FY15 H1 $23.01m
FY14 $9.868m
FY13 $13.814m
FY12 $42.966m
FY11 $22.86m
FY10 $11.896m

So let's just take FY15 full year to be $30m, the average of the last 5 years = $23.9m. Current market cap = $288.5m so earnings yield = 8.28%.

Dividend yield comes from earnings yield so shouldn't be double counted.

 

[Rainman]

Are you sure? IMF P&L over last 5 (and a half) years

FY15 H1 $23.01m
FY14 $9.868m
FY13 $13.814m
FY12 $42.966m
FY11 $22.86m
FY10 $11.896m

So let's just take FY15 full year to be $30m, the average of the last 5 years = $23.9m. Current market cap = $288.5m so earnings yield = 8.28%.

Dividend yield comes from earnings yield so shouldn't be double counted.

Yes, you are right. I stand corrected.

 

[McLovin]

Bought some more. These guys seem to be getting dragged down by SGH (as does SHJ), but they're completely different sort of businesses.

 

[VSntchr]

Bought some more. These guys seem to be getting dragged down by SGH (as does SHJ), but they're completely different sort of businesses.

With a post like that you'll fit in perfectly over at the pairs thread
Assuming we aren't starting a longer market wide correction (which is always an assumption but perhaps more pertinent currently?) then the unhedged read-through reversion trade looks good to me. I traded SHJ in the previous smack down.

 

[Klogg]

Bought some more. These guys seem to be getting dragged down by SGH (as does SHJ), but they're completely different sort of businesses.

The 4 cases they lost in FY15 probably doesn't help.

Of course, it then becomes a question of whether their case win % will revert to mean... which will only occur if their ability to identify the right cases hasn't diminished.

Given the company is trading at book, there's very limited downside.

 

[Ves]

Bought some more. These guys seem to be getting dragged down by SGH (as does SHJ), but they're completely different sort of businesses.

Are you sure it's not because of the uncertainty (or maybe lack of faith by the market) regarding their expansion into the US and Europe?

I haven't been following very closely, but it appears they have taken on lots of new cases during the last year, which means that cash outflows will start ramping up in the next few years. It also appears that they under-estimated the timeframe of the settlement of a few of their open cases, which have continued to drag on for longer than expected.

I also noticed that they experienced a few case losses in 2H 2015. These are of course part of the long term nature of this business (good years, bad years), but they'd had a pretty immaculate record since listing up until then.

It's not the easiest investment in the world to understand and value, so I guess if you add them all up they would impact short/medium term sentiment.

A lot of the market's perception of this company's value is under-pinned by the level of trust in management as good case portfolio managers.

I still have a look at this company every now and then, because given the nature of it, there's likely to be heaps of times where it'll be sufficiently misunderstood to offer a pretty good entry price.

 

[McLovin]

I also noticed that they experienced a few case losses in 2H 2015. These are of course part of the long term nature of this business (good years, bad years), but they'd had a pretty immaculate record since listing up until then.

They did but it was sort of a perfect storm. National Potato was from 2009, bank fees was from 2010 (and only lost on appeal). They are trying to diversify their portfolio with more investments and smaller $$ value, which explains the ramp up in case load. Overall they've had decisions on (iirc) 8 cases in the US and lost one. Sorry not being deliberately brief, but I'm on my phone which is PITA. Also don't forget if you lose in the US you don't have to pay other sides legal bills, unlike here.

It's not the easiest investment in the world to understand and value, so I guess if you add them all up they would impact short/medium term sentiment.

A lot of the market's perception of this company's value is under-pinned by the level of trust in management as good case portfolio managers.

Absolutely. And given SGH's problems started with that fuzzy accounting valuation of WIP (essentially investment in cases), it's not hard to understand why IMF SP is also under pressure . But I think they're very different, for one thing, IMF doesn't have hundreds of lawyers who need to be paid rail hail or shine.

Always good to hear your thoughs, ves.

 

[Ves]

Always good to hear your thoughs, ves.

Honestly, I haven't ran the numbers on this in a while. Thanks for the prompt!

 

[Triathlete]

Summary from Lincoln indicators stock doctor

IMF exhibits unacceptable levels of financial risk due to a below benchmark Financial Health score. Investors need to be aware such companies pose risks and warrant a speculative investment only. Any prospective investment should be managed with tight stop losses implemented.

From a technical view it has broken through the 50% levels of both the All time high $1.24 and 50% All time range $1.30 which are the two strongest levels this is not a good sign at present for this stock. Watching with interest....

 

[Rainman]

Summary from Lincoln indicators stock doctor

IMF exhibits unacceptable levels of financial risk due to a below benchmark Financial Health score. Investors need to be aware such companies pose risks and warrant a speculative investment only...

I have bought more of this as well. But I don't expect much love from it for a while. It is in the doghouse at the moment.

Do people really take their cues for buying and selling from things like Lincoln Stock Doctor?

Either way, the good doctor obviously has very demanding standards of "Financial Health". IMF has a current ratio of 5.5 and a debt to equity ratio of 26%.

 

[Klogg]

I've had a look at this recently and most things check out. Whether you value you it using a percentage return on intangibles/cases or as a percentage of claim value (using investment portfolio as of 30/09), it's difficult not to see value.

However, it seems Saker (MD) has no holdings in the company, and a 20% of his Short term incentive coming from an increase in case loads of 5%. Is this the reason for the recent increase in cases? (maybe it only appears that way to me)

Only in the LTIs is there a link to quality of cases, which is through the flow on in metrics (through relative TSR and CAGR).


What's more is the other two STI's incentivize profits in the short term...
Extract from the annual report:

The STIP metrics set for the 2016 financial year are
as follows:
The STIP has been set at 35% of TFR.

Three financial targets have been set, as follows:

Target 1 – 30% of the STIP opportunity (or 10.5% of the employees’ salary) will be awarded to employees if the Group achieves 5% growth in global net profit before tax (before bonus);

Target 2 – 30 % of the STIP opportunity (or 10.5% of the employees’ salary) will be awarded if the employees’ region achieves 5% growth in net profit before tax (before bonus);

Target 3 – 20% of the STIP opportunity (or 7% of the employees’ salary) will be awarded if the Group achieves 5% growth in the total claim value of the investment portfolio

 

[Rainman]

... However, it seems Saker (MD) has no holdings in the company, and a 20% of his Short term incentive coming from an increase in case loads of 5%. Is this the reason for the recent increase in cases? (maybe it only appears that way to me)...

The rationale behind increasing the number of cases is for IMF to take on smaller cases with a quicker commencement-to-resolution profile. The idea is that this will reduce the lumpiness of IMF's annual earnings.

 

[robusta]

Hugh McLernon the previous MD controls around 5mil shares. He was not ready to retire but when the opportunity to employ Mr Sakir came along was more than happy to step aside.

 

[Klogg]

Hugh McLernon the previous MD controls around 5mil shares. He was not ready to retire but when the opportunity to employ Mr Sakir came along was more than happy to step aside.

Thanks Robusta. May I ask where you found out that bit of information (bolded)?
I looked through the investor presentation prior to his appointment, and the Board Changes announcement on 05/01/15 and didn't find anything indicating this. I've clearly missed it somewhere.

 

[robusta]

Thanks Robusta. May I ask where you found out that bit of information (bolded)?
I looked through the investor presentation prior to his appointment, and the Board Changes announcement on 05/01/15 and didn't find anything indicating this. I've clearly missed it somewhere.

Pretty sure it was during the Q&A on one of their recent results podcasts, I will try to find it.

 

[Ves]

Any thoughts on the legislation risk for this stock? There were rumblings from the Senate (inquiry announced at the time, but I can't find it) and Productivity Commission recommendations early in 2015. But can't find anything since.

Here's a blog post from a court justice in Victoria written in March 2015 that summarises the state of play and potential changes:

http://www.supremecourt.vic.gov.au/...nding+in+class+actions+should+it+be+regulated

Capital adequacy, changes to contingent fee prohibition and caps on percentage of proceeds receivable by firms are all probably detrimental to IMF Bentham and friends in varying degrees.