The IMF Bentham Ltd (ASX: IMF) share price fell 9% to $2.90 after the company released its half year results this morning. Revenue fell 65% to $12.8 million and profit fell 131% to a loss of $4.4 million after tax. IMF maintained its interim dividend at 3 cents per share.
Revenues and profits fell due to a smaller case load and less income from litigation contracts, which fell 27% compared to the previous comparable period. As a litigation funder (IMF funds class actions against companies), IMF often has limited visibility on its revenue and cases that are launched can take several years to come to fruition.
As a result, earnings and profits can be lumpy. According to today’s presentation, the average length of cases is 2.6 years and the average return on invested capital is 1.5x, including lost cases.
As at December 30, IMF had $132 million in cash and $120 million in debt, resulting in a net cash position of $12 million. This will fall by $30 million following IMF’s investment in its two new funds (details below). However, it will also be buoyed by at least US$48 million following IMF’s recently announced sale of its US portfolio.
During the half, IMF funded 16 new cases (by comparison it funded 10 last year), including 8 in the USA and 8 outside the USA. IMF’s current investment portfolio includes 77 cases, 33 in the USA and 44 outside it. IMF also announced during the year that it was launching two new funds (largely funded by external investors) for future investments.
IMF is an interesting business, and the class action industry has only been growing in recent years. IMF doesn’t provide guidance due to the uncertain nature of its business, but management’s decision to launch several new funds could be a sign that IMF foresees significant future demand for litigation funding. Even if that is the case, the uncertainty of the business model makes IMF Bentham a higher risk investment in my opinion, and it is not suitable for all investors.