Ann: Hong Kong Case - Confidential Conditional Settlement, page-18

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04/07/17

13:33

Post #: 25655475
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Originally posted by Jimmy_C ↑

My two cents on valuation and lack of share price appreciation following yesterday's announcement: it largely depends on how you choose to value the business. I tend to use a blended approach of DCF of existing case book, plus a discounted terminal/stabilized value based on existing business parameters (i.e. resolving ~$1bn+ claim value per year into perpetuity at a given margin with given overhead); using this approach, yesterday's case win doesn't change valuation a huge amount (for me, only about $10m market cap uplift was justified given i assume each dollar invested in existing case book turns into $2 net of losses and withdrawals, whereas yesterday's case turned ~$10m into $30m, i.e. $10m more than my crude global assumption).

Next major milestone is to see the 30 June 2017 portfolio update and specifically the claim value of cases forecast to resolve in FY18. They had $1.33bn claim value forecast to resolve in FY18 per March 31, but i would guess that'll come down a little to more like $1.2bn given the history of IMF revising down claim value over time. If 15% of resolved CV flows to IMF as revenue, that gives a rough starting point of 15% * $1,200m = $180m gross revenue; assume 1.5x MOIC would give $72m cost; results in gross profit of $110m; less $40m corporate costs for $70m EBIT. Clearly Wivenhoe is the big variable - that could be literally be anything from a small-scale disaster (a ~$20m write-off) to a $100m gross profit in and of itself.

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Thanks for your detailed input, Jimmy_c.

So based on your projected $70M EBIT for FY18, we get an EV/EBIT ratio of 300/70 = 4.3. Based on your previous 'ball park' EV/EBIT of 7-8 (say 7.5) for a company like IMF, we could see an SP appreciation over the next 12 months to $1.95 x (7.5/4.3) = $3.40.

I prefer your EV/EBIT valuation method vs your blended DCF

IMF Price at posting: $1.95 Sentiment: Buy Disclosure: Held
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Ann: Hong Kong Case - Confidential Conditional Settlement, page-18

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