Litigation funder IMF Bentham Ltd (ASX: IMF) reported an uninspiring set of results for the year to 30 June 2015 yesterday. Total income was down 3.1% to $27 million whilst net profit fell 36.1% to $6.3 million. Dividends were maintained at 10 cents per share for the year placing the stock on a dividend yield of 6.3%.
It is important to note that although profit for the year was $6.3 million, there was also $8.7 million of unrealised foreign exchange gains included in the result. This means that had exchange rates moved the other way during the year, IMF would have produced a loss.
The first half of the year saw a strong net profit result of $23 million but in the second half the company recorded a loss of $17 million. The second half result was impacted by adverse rulings in two large cases, $5.5 million of losses related to the bank fees case and $8.4 million related to the National Potato Company case. Both these were lost on appeal where the original decision had gone the way of IMF and the company intends to re-appeal the bank fees case in 2016.
During the year IMF changed its chairman and chief executive and two other executive directors also left the board. Former managing director Hugh McLernon has been retained as an executive director.
IMF has only ever lost 10 cases out of 140 contested not including withdrawals. However four of these losses came in 2015 and another large loss of $13.7 million relating to the Bank of Queensland case was realised in 2014. As the company has grown, so too has the size of the cases it funds causing profits to be more volatile. Management is looking to address this issue by diversifying its case portfolio.
Part of this strategy is overseas expansion. The company opened its first overseas office in New York in 2011 and in May 2015 opened its third American office in San Francisco. Since inception, the United States business has contributed $20 million of net profit to the group.
IMF established a joint venture in Europe in 2014, opening an office in London and one in Amsterdam. It has also funded three cases in Hong Kong and plans to do more work in Asia.
Foolish takeaway
IMF's cases span many years and outcomes are uncertain. An investment in the company is really a bet on management's ability to manage this risk. Given the volatility inherent in the business and using history as a guide, it seems that in 2015 IMF got unlucky with the timing and decisions of a number of cases. Therefore the result is not a fair reflection on the true performance of the business.
Management advised that it expects to generate approximately $300 million in gross revenue from its current case portfolio over the next three years. However in 2015 it generated $92 million of gross revenue but still delivered a disappointing result. It is very difficult to pin down the true value of IMF which is why I do not own any shares in the company.
