IMF Bentham Ltd (ASX: IMF) provides litigation funding for class actions; under its business model, IMF agrees to pay for the costs of litigation, on condition that it receives a portion of the payout if the matter is successful.
A string of market updates by management show that this strategy appears to be delivering results, implying it might be time to buy shares in the business.
Market updates
On Monday, IMF provided an upbeat update on the status of its Australian litigation portfolio.
The update provided commentary on three Australian cases as follows:
1. Lehman Brothers Australia
The liquidator of the Lehman Brothers Australia class action recently declared and paid two dividends, representing aggregate distributions of over 70 cents in the dollar. This takes IMF's total anticipated receipts from the matter to $43.9 million.
2. Standard & Poor's
IMF funded the settlement of a class action against McGraw-Hill companies (the owner of Standard & Poor's). At the time of settlement, IMF expected to receive $52 million (before capitalised overheads). However, actual receipts totalled $54 million indicating IMF will report an additional $2 million profit (before tax) in the 2016 financial year.
3. Rivercity
IMF funded the conditional settlement of a class action against Aecom Australia. On 31 May 2016, management reported that one of the conditions to settlement is approval by the Federal Court. IMF reported that the application for approval will be heard on 10 August 2016, with management expecting the $29 million profit before tax to be booked in the 2017 financial year.
Other updates
Monday's announcement follows IMF's announcement last Thursday that it has sold its joint-venture stake in some European co-funding arrangements. Under the terms of the agreement, IMF will be bought out by its joint-venture partner and recognise a profit before tax of $3 million to $4 million on disposal.
Both sets of updates bode well for the company's outlook in my opinion.
Company outlook
Unlike listed legal services providers IPH Ltd (ASX: IPH) and Slater & Gordon Limited (ASX: SGH), IMF does not run its own cases. Instead, it assesses potential cases on their legal merits and then selectively funds cases which provide a positive risk-weighted payout.
This strategy has been in place for many years and appears to be working well, with management only losing a handful of cases out of the many hundreds it has funded.
Nevertheless, earnings remain lumpy given its profit depends on the outcome of cases it funds (which often run for many years). Accordingly, earnings can be volatile and therefore investors must look at its overall investment portfolio rather than focus on a few case wins.
In this regard, IMF stacks up solidly. As at 31 March 2016, the group had an estimated claim value of $3.4 billion, of which it expected to complete $212.7 million of claims in the 2016 financial year. In 2017, expected recoverable claims sit at $983.6 million, meaning profits could soar if case outcomes are favourable.
Foolish takeaway
Litigation funding is a fickle industry, but IMF's recent announcements provide a positive outlook on the company's prospects. With a healthy pipeline of cases ahead of it, and the likelihood of further favourable case settlements, IMF is one growth stock to keep an eye on.
