4C Report - December Half Year 1/4 ly, page-7

Thanks good comments.

re: Litigation Income "Oscillation" - I couldn't agree with you more. To be honest thats why I gave up doing forecasts in the traditional sense (yearly financials) and did an aggregate of the entire book. The aggregate provides a longer time period to smooth out the lumps.

re: Lost Appeals - The $47million in "lost cases" includes all court actions including appeals doesn't it (BOQ and Bank fees included)? Are you saying that this factor might not be representative of the business model going forward?

re: Overheads - I agree with you that the expansion has overheads rising faster than I would have liked. However I queried Julia about this and she told me:

“The year on year comparison of employee benefits expense is not strictly accurate as there are different
components in each of the year’s figures.
There was no bonus paid to Australian staff in either of 2014 or 2015, but there was in 2016. 2016 was also the first year for the company Long Term Incentive Plan for which there is an accounting expense to the profit and loss but there is no cash impact and indeed if the hurdles are not met, no shares will be issued. The 2016 expense also includes an amount of non-recurrent expenditure for restructuring costs.
The Company’s infrastructure has expanded, with the LA office being opened in September 2013, the San
Francisco office in May 2014, and the office in Toronto in January 2016.
The Company’s strategy is to increase the number of funded cases and diversify in terms of both the types of cases funded and the geography of those funded cases hence the requirement to expand our geographic footprint.”

So I agree with you that overheads are higher than ideal but given that there were a number of "one-offs" over the past few years I feel that overheads will start to plateau at $30million. The other thing I will say about overheads is theoretically you could exclude them from this model because IMF aren't spending the $30mill in overheads to finalise the current book (which is what this model is working out). The $30mill is really spent to attract future growth and future cases.

The last thing I will say about overheads is that in my opinion the growth in overheads is also masking the ROE and therefore the share price. For example if IMF didn't embark on this expansion and kept their overheads to the 2013 base level we still would have earned roughly the same income (due to the time lag of income in the business). Therefore if we adjust the accounts to assume FY 2014, 2015 and 2016 had the 2013 base level overheads the following is the adjusted ROE.

	Column 1	Column 2	Column 3	Column 4
0		2016	2015	2014
1	Adjustment	-21,656	-7,368	-3033
2	Adjusted Return	42,673	13,863	12,901
3	Adjusted ROE	21.2%	7.45%	6.7%

re: No resolved cases from overseas: I tracked all the cases and their ROCI and I had us down as resolving 9 cases from the US. 5 cases resolved in 2015 for a ROCI of 2.07x and 4 cases resolved in 2016 for a ROCI of 2.07x. I agree that the change of jurisdiction is a risk. However results to date have been consistent with Australia and talking to management they actually believe that because of there is no adverse cost risk that the ROCI will prove to be superior to Australia over time.