Is IMF Bentham Ltd a buy at this share price?

Credit: Patrick McKnight

Investors who feel companies have squandered their cash often turn to IMF Bentham Ltd (ASX: IMF) in a bid to claw some of it back.

And business has been good this year for IMF Bentham, which funds litigation claims.

The company, with a market value approaching $500 million, has a portfolio of cases under management which it values at $3.7 billion.

Currently the company is involved in cases against the Commonwealth Bank of Australia (ASX: CBA), UGL Limited (ASX: UGL) and Sirtex Medical Limited (ASX: SRX), to list a few.

The IMF Bentham share price has gained more than 60 per cent in the past year with shares in the company trading for about $2.85.

But are those gains justified?

For financial year (FY) 2017 IMF Bentham reported a net profit after tax of $15.4 million, down from the $20.9 million the company recorded the year before.

The company’s net income from cases was up slightly to $54.1 million for FY 2017 compared to $53 million in FY 2016.

But net operating expenses were also up, going from $26.8 million in FY 2016 to $28.4 million for FY 2017.

The fall in profit was reflected in a decline in the company’s return on equity which came in at about 7.6 per cent for FY 2017 compared to the 10.8 per cent the company recorded the year before.

As such, it may be difficult to see why the IMF share price has been climbing.

But those figures don’t tell the whole story.

IMF has been expanding in Asia and the United States.

More importantly, IMF increased its number of cases for FY 2017 by about 20 per cent on the previous year to 65.

As such, there is potential for the company to realise greater returns in the future.

And due to the uncertainty surrounding the nature of IMF’s business, particularly the length of time it takes to resolve cases, the figures do not always provide an accurate picture of IMF’s financial health.

Having said that, and while IMF does offer potential, I would consider other options given the uncertainty surrounding IMF’s current position amid a range of better alternatives on the market.

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Motley Fool contributor Steve Holland has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bentham IMF Limited. 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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