Manolete Partners PLC (LON: MANO) - Outstanding fundamental characteristics to drive promising future

Manolete Partners PLC (LON: MANO) is a FTSE AIM Index listed Insolvency Litigation Financing Company. The Company was founded in 2009, and presently, it is the leading Insolvency Litigation Financing Company. It works with insolvency practitioners and their lawyers to maximise returns to creditors. It has invested in over 450 cases claims in the United Kingdom. Generally, the case value ranges from £20 thousand to over £70 million. It also has in-house lawyers to review the case enquiries, which helps them to build a strong national network. The lifetime average duration of completed cases is 12 months, and with a lifetime ROI of 174%. It has been ranked as the Financial Times’ Europe’s Fastest-Growing Companies twice in 2018 and 2019.


(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the recent publication from the Grand view research, the market size for global legal services was valued at US$794.50 billion in 2018, and it is projected to grow by CAGR of around 4.1% from 2018 to 2025.

Highlights of favourable market drivers:
 

1. Shifting legal market dynamics: The demand for flexible law firms and alternatives to disputes fees rising with the changing expectations of corporates.

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

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

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

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

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

MANO is the leader in UK insolvency litigation market. It has managed over 40,000 bankruptcies and 14,000 corporate insolvencies per annum from 2008 to 2019. It also has a regional network of in-house lawyers and business development executives across all key commercial areas of the UK, which increases the penetration of lawyer referral network. The Company is further bolstered after the initial public offer (IPO) as it raised £14.6 million (net of expenses) to deploy funds in a growing number of cases. It had merely 4 in-house lawyers before the IPO; however, it is having 11 in-house lawyers post IPO, and each lawyer can manage around 25 cases. Therefore, 275 live cases can be project managed with the current infrastructure. Presently, it is managing 201 live cases. Further, it is planning to recruit junior lawyers to work under the senior regional heads to strengthen the in-house capability. It is also focusing on reducing the average case duration, which stood at 11 months in FY20, as compared to the lifetime average of 12 months. Moreover, it operates in a market which is categorised by growth and opportunities to supplement the potential for sustainable value creation. In the short-term, the Company has four strategic objectives to drive growth
 

1. Increasing market share to support the market transition to more efficient litigation funding model from old Conditional Fee Agreement model.

2. Grow regional presence to increase enquiries from Insolvency Practitioners (IPs) and lawyers.

3. Growth capital deployment to raise Manolete’s profile in insolvency marketplace.

4. Grow in-house expert capability

 

(Source: Presentation, Company Website)

The Company achieves senior-level coverage through a regional network of Business Development Executives and in-house lawyers across all key commercial areas of the United Kingdom. Manolete Partners has a strong strategic relationship, sound financial disciplines 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.

However, there are certain principal risk and uncertainties, which inevitably exists in the business model. There is a market risk regarding the inability to continually attract, select and pursue investments in the insolvency litigation market. Further, the over-reliance on key staff and inability to attract new lawyers can limit the expansion. Moreover, unexpected court decisions can lead to adverse legal costs, and the Company can suffer from bad debts. Also, the Covid-19 pandemic can delay the judgments due to court closure and restricted operations from the office. To meet the new regulations, the Company needs to implement new processes, failing to do so would increase the compliance risk. The Company operates in a regulatory environment; any change in regulations or government policies could affect the overall business of the Company.   

Segment Analysis

The Company operates through a single segment, which derives revenue from cases purchased from the insolvent estate and cases funded on behalf of the insolvent estate. The bifurcation of revenue origination in FY20 can be seen below:


(Source: Annual Report, Company Website)

Synopsis of Recent Developments

3 July 2020: The Company announced that it had undertaken 47 new case investments and already completed 23 cases in FY21 till date.
 
29 June 2020: MANO updated regarding the judgement on the case relating to Bright Futures Software Limited. The claims totalled approximately £7 million; however, it was held at a Fair Value of just £395,000 with capitalised costs of nearly £54,000 at the year ended 31 March 2020, in Manolete's books. MANO was unsuccessful on the two larger heads of the claim but successful on one of the smaller heads of the claim (£188,000 plus interest).

 

(Source: Annual Report, Company Website)

Non-Financial Key Performing Indicators

The image below depicts that business continued to grow at a decent pace during FY20 with the number of signed cases, purchased and funded cases.


(Source: Annual Report, Company Website)

Key Shareholders

Financial Highlights (FY2020): Impressive Double-Digit Growth in Revenue and EBIT


(Source: Company Website)

On 3 July 2020, the Company provided an audited result for the year ended 31 March 2020, with impressive double-digit growth in revenue and EBIT. The Company’s total revenues have increased significantly by 36% year-on-year to £18.7 million (FY19: £13.8 million), with an increase in realised revenue of 9% year-on-year and unrealised gains on investments of 65% year-on-year. Gross profit surged by 43% year-on-year to £14.4 million (FY19: £10.1 million), which reflects the movement towards the larger cases (in both realised and unrealised gains) and the increased number of live cases in the Company’s investment portfolio. Gross profit margin rose from 73% in 2019 to 79% in 2020.

Before non-recurring items, the operating profit increased by 36% year-on-year to £9.8 million (FY19: £7.2 million), with an increase in operating margin to 55% (FY19: 52%). Moreover, the profit before tax was up by 61% year-on-year to £9.5 million (FY19: £5.9 million). Diluted earnings per share for the financial year 2020 climbed by 70% year-on-year to 17 pence (FY19: 10 pence). The Board has proposed a final dividend of 3 pence per share, an increase of ~101% from the FY19 final dividend of 1.49 pence per share. On 31 March 2020, the Company had gross cash of £8.4 million and borrowings of £7.5 million.

Operational Highlights (FY2020) – Offering Sustainable Growth Rate Trajectory


(Source: Company Website)

The Company has seen a good level of realisations, with 54 cases completed in the financial year 2020. In FY2020, the new cases surged by 131% year-on-year to 141 (FY19: 61 new cases). Investment in cases on the balance sheet rose by 78% year-on-year to £32.4 million in FY20. On 31 March 2020, there were 152 live cases in progress, an increase of 81% year-on-year. According to the latest update (13 July 2020), it has 200 live cases in progress. The track record of financing 420 insolvency cases and completing 257 of those in an average duration of 12 months.FY20 vintage has ROI (return on investment) of 357%. In the three months ending 30 June 2020, the Company had signed 47 new case investments, representing a 124% increase on a year-on-year basis. Moreover, it has a long track record of delivering market-leading returns on invested cases with the shortest duration per case.

Financial Ratios – Higher Profitability Margins versus Industry Median 
 

Source: Refinitiv, Thomson Reuters

Reported profitability metrics for the financial year 2020 stood higher than the Industry Median, reflecting higher revenue generated and better control over expenses. Manolete Partners Plc has delivered a significant return for the shareholders’ as return on equity of 24.2% was higher as compared to the industry median of 14.3%. On the liquidity front, Manolete Partners Plc’s current ratio was higher than the industry median, reflecting sufficient current assets to pay the short-term obligations. On leverage front, the debt-equity ratio was 0.22x, which was marginally higher as compared to the industry median of 0.16x.

Share Price Performance Analysis


Daily Chart as on 18 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 18 August 2020, at the time of writing (before the market close, at 10:05 AM GMT+1), Manolete Partners Plc shares were trading at GBX 387.00, down by 0.26% against the previous day closing price. Stock 52 week High and Low were GBX 617.60 and GBX 220.00, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Manolete Partners Plc Vs FTSE AIM All-Share Index (2 Years)


 (Source: Refinitiv, Thomson Reuters)

In the last two years, Manolete Partners Plc share price has delivered 99.49% return as compared to the 8.17% return of FTSE AIM All-Share index, which shows that the stock has outperformed the index during the last two years.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Manolete Partners Plc with peers, Price/Earnings multiple has been used. The peers are EAB Group Oyj (Price/NTM Earnings was 22.29x), MJ Hudson Group Plc (Price/NTM Earnings was 31.43x), Nextstage SCA (Price/NTM Earnings was 8.91x), and Tatton Asset Management Plc (Price/NTM Earnings was 20.29x). The Average of Price/NTM Earnings of the Company’s peers was 20.73x (approx.).
 
Business Outlook Scenario

The Company is well-positioned in the insolvency litigation financing market for long-term profitable growth. Moreover, it shall provide attractive returns for shareholders in the short and medium-term either since it is currently running a record 200 live cases. Furthermore, the activity level remained robust in April to June 2020, despite Covid-19 disruption, with referrals of 186 cases as against 98 case referrals in the same period the past year. The economic dislocation caused by the pandemic is likely to generate a further increase in case referrals. Therefore, Manolete is well-placed to maintain the leadership position in the insolvency litigation financing market.

The Company has shown a robust financial performance in the financial year 2020. Both the top-line and the bottom-line performance have improved. MANO entered the financial year 2021 with strong momentum and is confident that investment in cases portfolio will fetch attractive returns. The Company witnessed strong growth in new case enquiries and completed 23 cases after the year-end. At present, Manolete Partners have 200 active cases versus 152 cases at FY2020 end with a rise in average size per case. MANO reacted rapidly to the challenges presented by the coronavirus outbreak and believes economic dislocations will lead to increase in case referrals. The Company believes it is well-positioned to establish itself as a market leader in insolvency litigation financing market. MANO has raised £14.6 million from IPO and successfully deployed to grow case-load of investments. The Company based on strong pipeline expects strong operational and financial performance in the coming years with support coming from the litigation funding market.
 

(Source: Company Website)
 
Manolete Partners Plc witnessed a CAGR growth of ~95.97% in net revenue over the period FY15 to FY20, while normalised PAT (profit after tax) recorded a stellar CAGR growth of ~160.90% during the same period.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Manolete Partners at the current market price of GBX 387.00 (as on 18 August 2020, before the market close at 10:05 AM GMT+1) with lower double-digit upside potential based on 20.73x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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