Litigation Capital Management Ltd (LON: LIT)

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 December 2018. Previously, it was also listed on the Australian Securities Exchange. Regarding operations, it functions through two business models – Direct Investment and Fund/Asset Management.

 (Source: Company Presentation)

Growth Prospects and Risk Assessment

Litigation Capital Management Limited has 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. It is also 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 Company operates with an unlevered balance sheet position, which yields significant potential for capital expansion and tapping investment opportunities. It has strong financial disciplines with good infrastructure to support rapid growth. LIT is actively engaged to improve its referral network, which will help them to capture additional market share and is monitoring opportunities to enter new markets.

 (Source: Kalkine Group, Refinitiv)

However, the increased competition could reduce the number of available investment opportunities. Moreover, the failure to raise adequate capital could impede growth opportunities. Also, the inability to invest timely could adversely affect portfolio performance. Furthermore, the growth is dependent upon the ability to originate investment opportunities and invest capital selectively. The Company is also exposed to various operational and financial risks with cybercrime, regulatory changes, and foreign exchange fluctuations. 

Industry Outlook Dynamics

According to the report from the Absolute Market Insights, the global litigation funding investment market was valued nearly US$10,916.3 Million in 2018 and it is projected to reach US$22,373.3 Million by 2027. 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 factors about the litigation market are:

• Low-level of market penetration though the demand for litigation is rising at an incremental rate.
• Volatile market conditions could increase the insolvency and dispute cases, and thus, the corporates tend to seek alternatives to dispute spending.
• The new jurisdictions and geographies are also showing an opportunity for litigation finance.
• The rising disposable income is also likely to create numerous investment opportunities.

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 24 August 2020, Litigation Capital Management announced the exculpation of portfolio finance agreement to provide finance facility to fund a portfolio subsidiary of global infrastructure and building contractor.

On 18 August 2020, Litigation Capital Management announced the selection of Gerhard Seebacher, as a director non-executive.

Key Performance Indicators

(Source: Annual Report, Company Website)

Financial & Strategic Highlights – FY2020 (30 June 2020)

(Source: Annual Report, Company Website)

• In the financial year 2020, the gross profit for the period increased by 7%, with total equity of AUD 82.2 million.
• Due to three investments shifting to the financial year 2021, the PBT (Profit before tax) declined to AUD 9.2 million.
• The cash balance as on 30 June 2020 stood at AUD 31.8 million, and the Company continues to deploy capital to direct investments as part of growing portfolio.
• The cash receipts from the completion of litigation investments surged by 14% to AUD 30.7 million; the third party capital stood at AUD 84 million.
• The GAR (Global Alternative Returns) fund oversubscribed, and the Company launched an asset management division.
• The Company made a decent progress in portfolio financing and taken eight resolutions across 2 Corporate Portfolios and entered into largest corporate portfolio transaction, with over 20 disputes with USD 34 million of capital commitment.
• The total AUM (assets under management) stood at $250 million as on 30 June 2020 and is expected to increase to $304 million by September.
• Driven by greater pools of capital and broader geographic reach, the applications received surged by 25% to 522.
• The Company witnessed an increase in Investment Commitment and Total invested capital by 50% and 87%, respectively, with cumulative IRR of 78% and 134% ROIC over the last 9 years.
• The Company together with DLA Piper has established customised Disputes finance facility.

Financial Ratios – Strong Liquidity Position versus the Industry Median (30 June 2020)

Reported profitability metrics for the financial year 2020 stood in line with the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, Litigation Capital Management Ltd.’s current ratio was significantly higher than the industry median of 1.60x, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the assets-equity ratio of the Litigation Capital Management Ltd.’s was 1.37x, which was lower as compared to the industry median of 3.52x.

Share Price Performance Analysis

 (Source: Kalkine Group, Refinitiv)

On 29 September 2020 (before the market close, at 11:26 AM GMT+1), Litigation Capital Management Ltd shares were trading at GBX 63.36, down by 1.92% against the previous day closing price. Stock 52-week High was GBX 80.81 and Low of GBX 38.10, respectively.

From the technical standpoint, 14-day RSI is currently supporting an upside move (around 25 level – oversold level), which means the stock price could increase in the short term.

In the last three months, Litigation Capital Management Ltd share price has delivered ~19.40% return as compared to ~ 7.48% return of FTSE-AIM index, which shows that the stock has outperformed the index during the last three months.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

(Source: Kalkine Group, Refinitiv)

 

Peers Benchmarking

 (Source: Kalkine Group, Refinitiv)

 

Business Outlook Scenario

Litigation Capital Management continues to grow at a brisk rate as applications, portfolio of investments, assets under management, and available capital all have increased in FY20 significantly. Further, the Company expects the resolution of seven investments in FY21, and thus, those resolutions are expected to generate gross profit between AU$30 million and AU$47 million. Meanwhile, the impact of Covid-19 on the maturation of the portfolio has been limited to date.

In FY20, merely three investments were delayed due to the inability of court systems, which has already been fixed. Further, the Company is not able to adequately forecast the adverse impacts of the plausible second or third waves of COVID-19 in FY21. Adjacently, it is encouraged by the increased opportunity in times of economic instability. It has deep referral relationships with clients which would support future growth. The quality of investment opportunities arising from restructuring and insolvency sector is likely to surge beyond the stabilisation of global markets. In a nutshell, LIT is exceptionally well-positioned among global peers to pursue upcoming market opportunities to generate sustainable returns for shareholders.

(Source: Company Presentation) 

Over the course of 5 years (FY15 – FY20), the company’s revenue surged from AUD 0.67 million in FY15 to AUD 38.4 million in FY20, compounded at an annual growth rate (CAGR) of ~124.72 per cent.

Considering the improved operational performance, strong financial position and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Litigation Capital Management Ltd at the current price of GBX 63.36 (as on 29 September 2020, before the market close at 11:26 AM GMT+1), with lower double-digit upside potential based on 9.76x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).  

 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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