Key Investment Highlights
 

1. Litigation Capital Management Ltd (LON: LIT) is an Australia based successful and experienced litigation finance company assisting hundreds of individuals and companies.

2. The group has helped its customers in the recovery of funds from legal claims at a lower cost and with minimum risk.

3. It offers a variety of services ranging from fully financed litigation, litigation finance for companies, funding for international arbitration, law firm or portfolio funding, disbursement finance, security for costs and judgment enforcement funding.

4. The closure of third-party fund in March 2020 has substantially increased the capital base.

5. The instability and volatility in the global market conditions will create ample opportunities for insolvency and disputes.

6. The company operates with unlevered balance sheet position, which reflects its potential to carry out capital investments without any constraints.

7. LCM’s funding criteria is transparent and is easy to apply, and the individual needs to meet certain criteria before financing the case.

8. The group has strong litigation revenue growth with decent operational performance for the period.

9. The group is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic.

10. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Litigation Capital Management Ltd has a decent track record of providing outstanding litigation solutions, driven by an effective investment selection, robust risk management and active project management initiatives.

Litigation Capital Management Ltd (LON: LIT) is a litigation finance company, which was founded in 1998. It is an alternate asset manager with expertise in investments pertinent to the global disputes market. The portfolio of investments includes the acquisition of claims, single?case disputes, commercial claims, class actions, claims arising out of insolvency and international arbitrations. It is headquartered in Sydney, Australia and has other offices in London, Singapore, Brisbane and Melbourne. The company was listed on the London Stock Exchange under Alternative Investment Market (AIM) with the ticker LIT, on 19^th December 2018. Previously, it was listed on the Australian Securities Exchange. Regarding operations, it functions through two business models – Direct Investment and Fund/Asset Management.


(Source: Annual Report, Company Website)

Highlights of FY2019
 

1. The group has completed 205 cases since inception.

2. 87 per cent of funded litigation projects were profitable.

3. Generated 8 years of cumulative portfolio IRR of 80 per cent.
 

Source: Company’s Annual Report 2019

Key Statistics



Investment Strategies

LIT group pursues the following three strategies across two business model:
 

1. Single?case funding: The company has adopted a single dispute strategy since its inception, and it comprises most of its investments.

2. Corporate portfolio funding: The companyis emerging as a global leader in corporate portfolio funding in which the capital investment is secured against the proceeds of corporate portfolio.

3. Acquisitions of Claims: Comprises investments in smaller disputes through the acquisition; it is still in the early stage of evolution. The company had introduced the pilot programme for this strategy in May 2019, and so far, the group remains positive regarding the assignment strategy.
 

Significant Developments Unveiled in the Current Year 2020 – Corporate Reorganisation

1. 20^th April 2020:LIT announced the conclusion of its joint venture with Vannin Capital Limited at an associate profit of AUD 2.45 million. The management stated that the profit received has exceeded the group’s expectation and will contribute to the gross profit for the current financial year.

2. 3^rd April 2020:Announced the relocation of its business from Sydney to London. Further, Mary Gangemi was appointed as Chief Financial Officer from 1^st April 2020.

3. 24^th March 2020:The final closure of its Global Alternative Returns Fund was announced. Previously, on 10^th March 2020, the company had concluded its third-party Fund at USD 140 million.
 

(Source: Half-Yearly 2020 Presentation, Company Website)

Top Shareholders

 

Financial Highlights - Decent Growth Trajectory in H1 FY2020 (ended 31 December 2019)


(Source: Annual Report, Company Website)
 

1. In the first half of the financial year 2020, driven bysustainable growth across the portfolio, the gross revenue increased to AUD 24.1 million as against AUD 11.7 million in H1 FY2019.

2. The group’s gross profit increased to AUD 12.2 million in H1 FY2020 from AUD 5.7 million in H1 FY2019.

3. The adjusted PBT (profit before tax) increased to AUD 6.9 million in H1 FY2020 from adjusted PBT (profit before tax) ofAUD 2.7 million in the first half of the financial year 2019. The group’s statutory PBT (profit before tax) stood at AUD 6.7 million in H1 FY2020 versus statutory PBT (profit before tax) ofAUD 1 million in H1 FY2019, driven by strong growth of revenue.

4. The adjusted basic earnings per share stood at 6.61 cents in the first half of the financial year 2020 versus adjusted basic earnings per share of 4.31 cents in H1 FY2019 with net cash of AUD 34.7 million.

5. The group’s litigation investment stood at AUD 34 million in the first half of the financial year 2020 versus AUD 20.7 million in H1 FY2019.
 

Financial Ratios - Strong Profitability Margins versus Last Year Profitability

 

The reported Gross Margin, EBITDA margin, Pretax margin and Net Margin stood at 49.7 per cent, 28 per cent, 28 per cent and 20.1 per cent, respectively, for the first half of the FY2020 stood higher than the profitability margins of H1 FY2019. The Return on Equity of 6.1 per cent in the first half of the financial year 2020 stood higher than the industry median and last year ROE for the same period. On the liquidity front, Litigation Capital Management Ltd.’s current ratio was significantly higher than the industry median of 1.79, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the assets-equity ratio of theLitigation Capital Management Ltd.’s was 1.15x, which was lower as compared to the industry median of 3.67x.

Share Price Performance


Daily Chart as on 28^th April 2020, before the market close (Source: Thomson Reuters)

On April 28, 2020, at the time of writing (before the market close, at 11:09 AM GMT), Litigation Capital Management Ltd shares were trading at GBX 61.565, down by 0.54 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 117.50/GBX 37.87.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 30-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology (illustrative)

Method 1: Price/Earnings Approach (NTM)



To compare Litigation Capital Management Ltd with its peers, Price/Earnings multiple has been used. The peers are Pargesa Holding SA (NTM Price/Earnings was 23.22), Investor AB (NTM Price/Earnings was 36.00), Burford Capital Ltd (NTM Price/Earnings was 5.10), 1pm Plc (NTM Price/Earnings was 2.06) and Plus500 Ltd (NTM Price/Earnings was 8.27). The Average of Price/Earnings (NTM) of the company’s peers was 15.00x (approx.)

Method 2: Enterprise Value to Sales (NTM) Approach



To compare Litigation Capital Management Ltdwith its peers, EV/Sales multiple has been used. The peers are 1pm Plc (NTM EV/Sales was 0.46), Eurazeo SE (NTM EV/Sales was 1.57), GLI Finance Ltd (NTM EV/Sales was 2.63), Plus500 Ltd (NTM EV/Sales was 2.93) and Burford Capital Ltd (NTM EV/Sales was 3.02). The Average of EV/Sales (NTM) of the company’s peers was 2.00x (approx.)

Litigation Capital Management LtdVs FTSE AIM 100 Index (5 Years)

(Source: Thomson Reuters)

In the last five years, Litigation Capital Management Ltdshare price has delivered 3.32 per cent returns as compared to negative 7.52 per cent returns of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Market Outlook Dynamics
Over the past 10 years, there has been a substantial growth under the various class of claims, insolvency and international arbitration. The continuous growth in single-case funding and untapped opportunity in the corporate portfolio shall yield strong growth in the litigation funding market. Some of the favourable highlights about the litigation market:

1. Shifting legal market dynamics: The demand for flexible law firms and alternatives to disputes fees rising with the changing expectations of corporates. Hence, it creates further opportunity for LIT.

2. Uncorrelated returns: Investments related to direct investments and fund portfolio are uncorrelated in nature.

3. Countercyclical business: During the volatile market conditional globally, the instances for insolvency and disputes surges and corporates tend to seek alternatives to dispute spending.

4. Low market penetration: The level of market penetration in which the company operates is quite low, while the demand for litigation is rising.

5. The Rapid expansion of demand: The demand for litigation is growing at an incremental rate.

6. Growing industry globally: The new jurisdictions and geographies are also showing opportunity for litigation finance.
 

Litigation Capital Management Limited has an extensive experience of over two decades in complex dispute funding, and it maintains a well-diversified portfolio of funds by sector, geography and capital commitments. The company is establishing its presence in new sector opportunities by advancing the corporate portfolio funding, conducting a pilot programme for smaller claims in the insolvency market and enhancing flow in international arbitration. Further, the group operates with an unlevered balance sheet position, which yields significant potential for capital expansion and tapping investment opportunities.

Growth Prospects and Risk Assessment

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. LIT 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. The company operates in multiple 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.

Business Outlook Scenario

The group has shown decent financial performance in the first half of the financial year 2020. The group has made a significant increase in both the quality and the number of applications received.

The company is looking forward to exploring opportunities in the untapped and vast corporate portfolio space and expects single-case funding growth. LIT based on its strong pipeline expects strong operational and financial performance in the coming years, with support coming from the litigation funding market. The groupoperations are impacted by the covid-19 outbreak and has taken steps to tackle the uncertain situation.

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 the decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current of GBX 61.22 (as on 28^th April 2020, before the market close at 8:55 AM GMT+1), with lower-double digit upside potential, based on 15.00x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 2.00x NTM EV/Sales (approx.) on FY20E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.