Company: Bentham Ltd (IMF)
Share price: $1.82
Future value: $2.28
Potential upside: 25%
Despite a wobbly start to 2014, the Australian stock market is holding up well and shares remain relatively expensive, with outstanding “value” shares hard to find.
However, in Bentham IMF, a global operator in an interesting and profitable niche, Australian investors could have a good buying opportunity at current levels.
Bentham is a litigation funder. It makes its money by funding, investigating and managing court cases where a litigant is making a financial claim against a defendant – usually a company but sometimes individuals – for an amount of at least $5 million. Bentham pays the legal fees and associated costs and in return it takes a percentage of any financial settlement as a “success fee”. This can range between 20% and 45% of the payout, depending on the strength of the case, the complexity and the time it may take to complete. The average cut is 34% of the gross settlement.
Bentham has a strong track record with a 97% win rate and over 60% of cases settled before going to court.
Although it is an Australian founded and listed company, it has an international presence with operations in the UK, Europe, Canada, South Africa and New Zealand, with a wholly owned subsidiary set up in New York in 2011 – giving it access to the US which is the world’s largest litigation market.
The company has no debt and ranks highly on our unique financial quality rating, scoring 8.5 out of 10 based on over forty measures of financial strength.
It recently completed an oversubscribed placement of 18.5 million new shares which raised $40 million of working capital to be largely reinvested in the international business.
Looking forward, the company’s pipeline of cases looks promising and includes claims totalling over $2 billion, among them the case of the alleged Brisbane victims of the Wivenhoe Dam flooding.
With a grossed up yield of 7.9%, investors have some built-in protection against capital fluctuations in the share price, which can be volatile because earnings tend to be “lumpy” (coming as they do in large, spaced out chunks as cases are won or settled).
The management has a strong record of growing the business at a sustainable rate and has an average “normalised” return on equity of 35% over the last 5 years. We calculate that it need only achieve a return of 22% on equity to hit its price target.
Therefore, for those with a diversified portfolio and a decent time horizon, Bentham looks worth considering as an interesting addition, with considerable upside potential in a growing market segment.
++Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.
Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.
Information is intended as a guide only. For specific advice contact your financial services professional.