What I dont like about the recent accounts is the increasing cost base of the business. Since 2013 the cost base (predominately in the Employee Benefits Expense and Corporate and Office Expenses in the annual report) have been increasing substantially?
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
Column 8
0
2016
% chge
2015
% chge
2014
% chge
2013
1
Employee Benefits Expense
20,784
104.61%
10,158
53.36%
6,624
41,15%
4,693
2
Corporate and Office Expense
7,212
103.15%
3,550
29.14%
2,749
66.89%
1,647
Does anyone know where this costs base will level out? i.e does anyone know what the "overhead" expenses will be in 2017 and beyond?
I know management will say that they "investing for growth" etc etc however Rob Ferguson publicly stated in 2014 in an interview with Alan Kohler that he believed that the business at this time could scale internationally without extra costs (such that the business is incurring now). His comments from the extract at 4.29 are:
“We have built and organisation that has the capacity to do a lot more. We have the capacity to scale the business up. I think about it like funds management where we have a great business model and we have fantastic skills investment skills….the best in the world. We could do with a lot more deal flow. We could deal with more funds under management. We have proven ourselves with the existing portfolio of funds under management. We have a $2bill book here and we want to go overseas to increase the size of our book. And we don’t really need to increase the headcount very much. The cost of going into the UK and US is pretty much at the margin. Talking about a million here and a million there so its not a high overhead business. We have the sunk overheads in Australia $12-14mill and its a matter of getting more deal-flow into that fixed overhead structure”
Secondly what is worrying is that the cost base has increased much more than the litigation expenses (and therefore the gross profit). Historically the relationship between these costs was in the teens%. This is now in the 30's%. Do we think that litigation expenses will rise to this level or do we think the cost base is permanently a higher percentage?
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
0
2016
2015
2014
2013
2012
2011
1
Payments for Litigation Funding
82605
49199
57085
44383
49489
37366
2
Payments to suppliers and employees
27760
15807
6751
8095
6180
3654
3
Suppliers and Employees as % of Litigation
33.61%
32.13%
11.83%
18.24%
12.49%
9.78%
When I look at key competitors (Burford) accounts I don’t seem the same increase in the cost base. In fact their ratios are going the other way. They are keeping the overheads low and managing to grow the litigation investments (their business model reminds me of Rob Fergusons comments)
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
0
Burford
2016 (Burford is 6 month interim)
2015
2014
2013
2012
1
Funding of Litigation Investments (cashflow statement)
174384
91392
91022
46781
57106
2
Operating Expenses (profit and loss)
-14535
-25,840
-21,323
-18,146
-20,139
3
-8.34%
-28.27%
-23.43%
-38.79%
-35.27%
4
IMF
5
Payments for litigation funding and capitalised suppliers and employee costs (Cashflow statement)
-82605
-49199
-57085
-44383
-49489
6
Total Expenses (profit and loss)
30404
15,609
12,316
7,456
11,590
7
-36.81%
-31.73%
-21.58%
-16.80%
-23.42%
Now management provide us with their projections for 2017 and 2018 and the budgets have growth but not growth of the margins that their cost base has been growing at.
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
0
FY 2016 ( Actual)
Growth
FY 2017 (projected)
Growth
FY 2018 (projected)
1
Cases funded
27
100.00%
54
12.96%
61
2
Funds committed (A$ million)
$81
32.10%
$107
14.95%
$123
It looks to me that Buford are executing the investment thesis that I had around improving operational leverage and IMF are instead massively increasing costs and scale to get growth.
It is starting to look like we have backed the wrong horse.
IMF Price at posting:
$1.76 Sentiment: Hold Disclosure: Held
