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Profit rockets – but the IMF Bentham Ltd share price is tumbling

The IMF Bentham Ltd (ASX: IMF) share price has fallen 4% today, despite the company reporting a solid set of numbers today. However, since this time last year, IMF’s shares have surged a massive 107% as a number of favourable case outcomes and strategic expansion into the U.S. takes shape.

On Friday, Australia’s oldest litigation funder handed down its 2017 half-year results. Whilst the share price lost ground in early trade, key highlights from IMF’s results were:

  • Profit from continuing operations swelled 3,784% to $14.0 million
  • Total income from operations jumped 179% to $36.5 million
  • Total income from litigation contracts increased 154% to $66.7 million
  • Estimated case portfolio value decreased slightly to $3.37 billion as six cases were concluded
  • An interim dividend of 3.0 cents per share was declared

In my opinion, IMF’s results for the half were very strong. Whilst IMF rebounded from a loss in the prior year to make the whopping percentage gain in profit less meaningful, Friday’s results demonstrate a robust business model which carries all the right hallmarks for long-term success.

IMF’s business model

IMF is in the business of providing funding to cases of high interest. Unlike fellow listed legal services providers IPH Ltd (ASX: IPH) and Slater & Gordon Limited (ASX: SGH), IMF merely assess the merits of legal cases for determining funding investment. It then selectively funds those cases and takes a percentage of the settlement if the case is successful.

In essence, the company acts like a fund manager, investing in an array of cases which are likely to provide a positive payout based on their legal basis. Whilst the past has shown that this model can result in adverse outcomes also, IMF’s history demonstrates sound execution of this strategy with the company boasting a 90% success rate of all cases it has funded.

Growth outlook

The average case length is 2.4 years meaning earnings can be lumpy year-to-year. Friday’s results are evidence of this with a number of key cases settling this half.

Nevertheless, management is not resting on its laurels and waiting for case results alone.

As announced on Wednesday, IMF’s US operations are in the midst of expansion with IMF’s wholly-owned US subsidiary – Bentham Capital LLC – opening an office in Houston, Texas. The recent opening is in addition to Bentham Capital’s three existing offices in New York, San Francisco and Los Angeles, demonstrating management’s intention to diversify earnings away from Australia. This should prop up growth in the coming years.

Foolish takeaway

Investors must remember that litigation funding can be fickle, given the ups and downs of legal proceedings. Nonetheless, IMF’s results demonstrate that sound case management and prudent case selection can provide long-term windfalls.

Accordingly IMF is a buy in my opinion.

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Motley Fool contributor Rachit Dudhwala owns shares of Bentham IMF Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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