IMF (Australia) Limited (ASX: IMF) was featured in our previous article of 3 December 2011. In that article, we outlined our expectations for IMF to achieve an average net profit per year of at least $24m, and to grow the investment in its case portfolio.
On 23 February 2012, IMF announced its half yearly results with a net profit figure of $11.9m, which just about met our expectations. This profit is down 21% from the last comparable half. Management also deferred its decision on payment of a dividend. Case investments have gone up to a total of $69m on the balance sheet, and the size of the case portfolio remained at $1.6b.
That is all pretty disappointing on the face of it, until you get to IMF management's lengthy presentation plus Q & A. The presentation is available via BRR Media and I would strongly urge interested investors to listen carefully because the excitement really begins here.
Dividends and cashflow
Managing Director Hugh McLernon stated that a half yearly performance such as this will normally result in payment of a dividend. He explained that the decision is not due to lack of cash, as IMF has $50 m in the bank and expects payment of another $20m very soon for their involvement in the Pan Pharmaceutical and Credit Corp cases. Indeed, a glance at the cashflow statement also shows that IMF has positive operating cashflow this half.
McLernon explained that there are currently no franking credits, so a decision to pay an unfranked dividend does not make sense for shareholders. More importantly, he explained that the money is required because of the nature of the case pipeline.
Cases and cases galore
For the first time in a decade, IMF has to deal with 6 major cases nearing finalisation at the same time. Hugh was emphatic that IMF expects to be successful in these 6 cases, either by court judgment or by settlement. The cases in question are Lehmans, BOQ, Uniloc, LGFS, Centro and Collyer Bristow.
The message is quite clear – IMF expects to win, and to win big, and we will see the results very soon.
McLernon also emphasised that there are a series of other big cases, including Great Southern, Air Cargo, Brisbane's Wivenhoe Dam, ABC Learning, and the Bank Fees cases. Apparently, these cases involve huge dollar sums but are currently not included in the case portfolio.
Other positive news
The company also mentioned that regulation is no longer a serious threat to IMF's business model, that the US business is progressing well with three matters coming up for presentation before the Board, and that the competition for litigation funding "remains desultory." Hence, IMF is not forced to sacrifice margins or quality for the sake of volume. This is an important indicator on the quality of the case portfolio, and the expected returns.
Conservative and shareholder friendly
One would normally expect conservative behaviour from a person with Hugh McLernon's background. Nevertheless, after listening to the presentation, I am comforted that IMF management is acting in a conservative manner for the benefit of shareholders. The following are just several examples of such conservatism:
- The preservation of a cash buffer to fund the current case pipeline
- Cases in the pipeline are not included in the case portfolio
- Refusal to back down on funding terms or to sacrifice quality of cases to be funded
- Planning based on "absolute worst case scenarios"
Foolish takeaway
Our view of IMF remains unchanged since our last update on 3 December 2011. In fact, the upside potential has increased considerably, from potential cases such as Wivenhoe.
Our original thesis of IMF gaining $3 for every $1 spent continues to be reaffirmed with the recent settlement of Centrex. We are certainly aware that many investors may not agree with our opinion on IMF. Nevertheless, investors should bear in mind Warren Buffett's words that one pays "a high price for cheery consensus".
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Fool contributor Peter Phan owns shares in IMF (Australia) Limited. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
