Focused on litigation financing, Litigation Capital Management Ltd, also known as LCM, operates in an industry that is characterised by volatile earnings and capital intensive operations. Investors of the largest competitor IMF Bentham (IMF.ASX) have experienced a roller coaster ride over the past three years with share price movements of over 60% per year. The key message in LCM’s prospectus is that the company has won 78% of all litigation cases since 1998, but is a strong track record enough to create shareholder value?
LCM’s principal activities are investigation, management and funding of litigation for companies and individuals with a focus on commercial litigation, insolvency matters and class actions. Founded in 1998, the company has managed 46 litigation projects with a historical success rate of 78% and over the past five years a return on invested capital of 2.3 times was achieved. The current order pipeline spans over 14 projects with a gross claim size of $379 million.
The company is trying to raise up to $15 million via conventional IPO in order to transition from an externally financed to an internally financed business. If litigation cases are internally financed, LCM can reap the full economic benefits if the settlement is successful rather than having to pass on the funds to the third party that provided funding. Management predicts a net profit after tax of $4.4million for fiscal year 2017 based on the current projects pipeline, average time to completion and historical success rate. However, poor litigation outcomes or major delays with project delivery will adversely impact financial performance which is the biggest risk for a company operating in this space.
The potential claims portfolio offers upside for shareholders but management is required to control costs and manage capital appropriately. A large settlement win and introduction of a dividend may help re-rate the share price, but IPO investors need to consider the volatile nature of this business.
ASX Code: LCA Shares on Offer: 21.4m Listing Price: $0.70 Market Capitalisation: $37.5m Listing Date: December 13
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.
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