Bentham IMF: High dividends and growth

You may not be fully aware of litigation funding in Australia. That would be understandable as it is only seven years since the High Court gave litigation funding its blessing.

Bentham IMF (ASX: IMF), formerly IMF Australia is the dominant player in a relatively new sector that has largely been ignored by broking research analysts because lumpy earnings and variable dividends stray from the norm. At current levels it represents a compelling investment opportunity.

Bentham IMF is engaged in providing funding of legal claims and other related services, in Australia and in other jurisdictions, where the claim size is over $5 million. It conducts its operations in Australia through its Australian Financial Services License, and in the USA through its recently set up wholly owned subsidiary in New York.

One may consider other ASX-listed legal companies like Slater & Gordon (ASX: SGH) and Shine Corporate (ASX: SHJ) to be competitors. However, legal firms in Australia cannot fund litigation proceedings and are compelled to use external parties, as lawyers can’t be seen to have a conflict of interest in both funding and prosecuting a case. Thus, Bentham IMF has a significant moat around its operations due to potentially high barriers to entry.

It is also one of the world’s most successful litigation funders. A litigation funder pays the legal fees and all associated costs in the undertaking of a legal action. In exchange the funder is entitled to a share of any successful settlement. The industry offers very high margins, with Bentham IMF averaging 34% of the gross settlement with an outstanding 97% win rate and over 60% of cases are settled before going to court.

Bentham IMF’s investment managers have over 100 years of collective experience in the industry, while Managing Director Hugh McLernon has over 20 years of experience.

Dividends have been variable, but over the last five years the average fully franked dividend has been 10 cents. At current levels this represents a 5.84% yield prior to franking. The variability is explained by uncertainty in predicting the finalization of cases as well as the necessity to keep large amounts of cash on hand. The latter acts as a form of intimidation to defendants who know that such deep pockets will comfortably fund pursuit through the courts. This latter point also explains how so many cases settle prior to reaching court.

Why invest now?

Bentham IMF has recently completed a heavily oversubscribed placement of 18.5 million new shares at $1.70. Combined with a share purchase plan, the total funds raised were $41.4 million, which will be applied in redeeming any outstanding convertible notes and providing working capital for the  international business. The current price is $1.71, representing an entry level approximating that reserved for the privileged few during the raisings.

Additionally, with the 27 November announcement that proceedings are now viable against the State Of Queensland regarding the alleged Brisbane flood victims of the Wivenhoe Dam, the company’s investment portfolio now includes claims with a total value in excess of $2 billion. In a late October Asian conference, a stated aim by management was to have an investment portfolio of $2 billion.

The intention to pursue further offshore expansion will provide growth but is not without risk. However, management has a lengthy record of cautious progress.

Foolish takeaway

In my opinion, it is an opportune time to invest in Bentham IMF for investors with a medium and long term horizon. The high yield limits any material downside while growth via an increasing case portfolio in Australia and the recent overseas expansion, appears quite secure. The only note of caution is for those investors who rely upon a regular predictable income and annual earnings certainty.

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Motley Fool contributor Mark Woodruff owns shares in Bentham IMF.

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