Business Overview
Litigation Capital Management Ltd (LON: LIT) is an Australian based Litigation Finance and ancillary services company. The group was incorporated in the year 1998 and help its clients in funds recovery from legal claims. The company’s primary focus is on management and financing of Litigation Projects. The company has provided assistance to more than 40 Completed Litigation Projects, which include nearly 190 cases. The majority of the projects are obtained in insolvency, accounting and Australian legal sectors using the referral networks. The company has its offices in Sydney, Melbourne, Brisbane, Singapore and London. The company’s product portfolio includes Judgement enforcement funding, Security for Costs, Funding for International Arbitration, Law Firm/ Portfolio Funding, Disbursement Finance, Fully Financed Litigation and Litigation Finance for Companies.

The current Non-Executive Chairman is Jonathan Moulds. Patrick Moloney holds the responsibilities of the Chief Executive Officer and becomes executive director in December 2013. Stephen Conrad holds the responsibilities of Chief Financial officer.

Key Statistics



Top Shareholders

 

Recent News

On 20th December 2019, Litigation Capital Management Ltd announced the resolution of two single-case investments. The first resolution was pursued in the Queensland, Australia based Supreme Court and was resolved via negotiation. The resolution generated a revenue of around AUD 6.45 million and a gross profit of AUD 2.5 million (approximately).The second resolution was pursued in the New South Wales-based Supreme Court and was resolved via negotiation. The resolution generated a revenue of around AUD 4 million and a gross profit of AUD 2.5 million (approximately).

On 10th December 2019, Litigation Capital Management confirmed that they are having advanced discussions in relation to the establishment of a 150 million US dollar third party fund where the company will act as a fund manager to the fund.

Financial Highlights – Financial Year 2019 (30^th June 2019, AUD, thousand)


(Source: Annual Report, Company Website)

For the financial year ending 30^th June 2019, driven by an increase in the litigation services revenue for the period, the company’s revenue increased to AUD 34,707 thousand from AUD 29,683 thousand in the financial year 2018. The company’s gross margin stood at AUD 20,341 thousand in the financial year 2019 versus AUD 16,510 thousand in the financial year 2018. Due to an increase in the expenses related to employee benefits, depreciation, IPO and other corporate expenses for the period, the company’s PBT (Profit before tax) declined to AUD 10,150 thousand in the financial year 2019 from PBT (Profit before tax) of AUD 11,964 thousand in the financial year 2018. The company’s PAT (Profit after tax) stood at AUD 7,111 thousand in the financial year 2019 versus a PAT (Profit after tax) of AUD 8,638 thousand in the financial year 2018. The company’s basic earnings per share stood at 8.65 cents in the financial year 2019 versus basic earnings per share of 15.24 cents in the financial year 2018. The company’s diluted earnings per share stood at 8.07 cents in the financial year 2019 versus diluted earnings per share of 15.07 cents in the financial year 2018. The company’s total assets were reported at AUD 84,744 thousand in the financial year 2019 versus total assets of AUD 29,526 thousand in the financial year 2018. The company’s net assets were reported at AUD 76,239 thousand in the financial year 2019 versus net assets of AUD 25,423 thousand in the financial year 2018. The company’s IRR (Internal rate of return) for 8 years stood at 80 per cent. The company’s 8-year Portfolio ROIC (Return on Invested capital) stood at 135 per cent.

Operational Advancements


(Source: Annual Report, Company Website)
 
The company remained focused on building strong foundations and to support the growth, the group has made significant operational advancements. The company’s total equity surged to AUD 76.2 million in FY2019 from AUD 7.4 million in FY2015 and achieved a Compounded annual growth rate (CAGR) of 79 per cent in the last 4 years. The company’s cash generation (including cash held in Escrow) increased to AUD 34 million in FY2019 from AUD 0.6 million in FY2015 and achieved a Compounded annual growth rate (CAGR) of 174 per cent in the last 4 years. The company’s cash generation increased to AUD 26.8 million in FY2019 from AUD 0.6 million in FY2015 and achieved a Compounded annual growth rate (CAGR) of 159 per cent in the last 4 years.

Financial Ratios

 

The reported gross margin in the financial year 2019 surged by 5.7 per cent to 58.5 per cent as against a gross margin of 52.8 per cent reported in last year for the same period. The reported EBITDA margin declined for the financial year 2019 to 31.9 per cent versus EBITDA margin of 43.2 per cent reported in last year for the same period and was lower than the industry median of 32.7 per cent. The reported operating margin declined for the FY2019 to 29.2 per cent versus an operating marginof 42.6 per cent reported in last year for the same period. The reported Pretax margin stood at 29.2 per cent for the financial year 2019 as against Pretax margin 40.3 per cent reported in last year for the same period and was higher than the industry median of 24.4 per cent. Net margin reported was 20.5 per cent for the financial year 2019 as against net margin of 29.1 per cent reported in last year for the same period. Return on equity for the Financial year 2019 stood at 14.00 per cent and was higher than the industry median of 10.4 per cent. On the liquidity front, Litigation Capital Management Ltd.’s current ratio stood at 8.60x and was higher than the last years’ current ratio of 6.26x and was significantly higher than the industry median of 1.37x. On leverage front, the asset-equity ratio of the Litigation Capital Management Ltd.’s was 1.11x and was lower than the last years’ asset-equity ratio of 1.16x.

Share Price Performance


Daily Chart as at 11^th February 2020, before the market closed (Source: Thomson Reuters)

On 11^th February 2020, while writing at 9:44 AM GMT, Litigation Capital Management Ltd. shares were clocking a current market price of GBX 65.00 per share, which declined by 1.23 per cent in comparison to the last traded price of the previous day.The company’s market capitalisation was at £75.57 million, with a dividend yield of 1.08 per cent at the time of writing.

On 1^st May 2019, the shares of Litigation Capital Management Ltd. have touched a new peak of GBX 117.50 and reached the lowest price level of GBX 57.43 on 7^th August 2019 in the last 52 weeks. The company’s shares were trading at 44.68 per cent lower from the 52-week high price mark and 13.18 per cent higher than the 52-week low price mark at the current trading level as can be seen in the price chart.

The company’s 5-day stock's daily average traded volume was 119,228.60; 30 days daily average traded volume - 139,689.60 and 90-days daily average traded volume – 149,912.22. The average traded volume for 5 days was down by 14.65 per cent as compared to 30 days average traded volume.

Valuation Methodology

Method 1: Price to Book Value Approach (NTM)

 

To compare Litigation Capital Management Ltd with its peers, Price/Book Value multiple has been used. The peers are Sliver Chef Ltd (NTM Price/Book Value was 0.01), Millennium Services Group Ltd (NTM Price/Book Value was 0.03), Tarena International Inc (NTM Price/Book Value was 0.045), Collection House Ltd (NTM Price/Book Value was 0.04) and Hi Sun Technology (China) Ltd (NTM Price/Book Value was 0.055). The Average of Price/Book Value (NTM) of the company’s peers was 0.036x (approx.)

Method 2: Price to Earnings Approach (NTM)
 

To compare Litigation Capital Management Ltdwithits peers, Price/Earnings multiple has been used. The peers are Healthcare Services Group Inc (NTM Price/Earnings was 19.87), Nomura Co Ltd (NTM Price/Earnings was 19.04), Science Group Plc (NTM Price/Earnings was 14.94), Cardtronics Plc (NTM Price/Earnings was 14.73) and Petards Group Plc (NTM Price/Earnings was 9.30). The median of Price/Earnings (NTM) of the company’s peers was 14.94x (approx.)

Risk Assessment and Growth Drivers

The company operates inmultiple geographies, and its profits can be impacted negatively due to foreign exchange rate fluctuations. To meet the new regulations, the group needs to implement new processes, failing to do so would increase the compliance risk. The company has been focussed on its services and customer support, which has resulted in a higher level of customer satisfaction. The company has strong financial disciplines which helped the company to have a robust and effective balance sheet with good infrastructure to support rapid growth. The company is looking forward to identifying new sector opportunities within the Litigation market. The company is actively engaged to improve its referral network, which will help them to capture more market share and is monitoring opportunities to enter into new markets.

Conclusion

The group’s top line accelerated in FY2019 as compared to FY2018 data. The company needs to manage its operating and non-operating cost-effectively to improve its bottom line. The group has made a significant increase in both the quality and the number of applications received. In FY2019, the company received 419 applications versus 125 applications in the financial year 2018, an increase of 235 per cent. The company is actively engaged to improve its referral network, which will help then to capture more market share and is monitoring opportunities to enter into new markets.

The company is looking forward to exploring opportunities in the untapped and vast corporate portfolio space and expects single-case funding growth. The company, based on its strong pipeline expects strong operational and financial performance in the coming years with support coming from the litigation funding market.

Over the course of 5 years (FY14 - FY19), the company’s revenue surged from  AUD 0.42 million in FY14 to AUD 34.71 million in FY2019. Compounded annual growth rate (CAGR) stood at 141.79 per cent.
 
Based on fundamental prospects and support from valuation done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 64.26 (as on 11^th February 2020, before the market close at 8:05 AM GMT), with lower double-digit upside potential based on 0.036x NTM Price/Book Value (approx.) on FY20E book value per share (approx.) and 14.94x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.Currency exchange rate taken for 1 AUD = 0.51839 GBP.

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