Yes, i think we are more or less on the same page. Personally, i...

Yes, i think we are more or less on the same page.

Personally, i don't think there's necessarily a "perfect" or "correct" way to forecast this business, so one has to just set general parameters and use the results of any valuation exercise as a very rough guide - sitting here today and using past results as a guide, the current book might feasibly generate anything from ~$400m income up to ~$600m income, at pre-overhead MOICs anywhere from ~1.6x up to >2x. The large range in outcomes is an unavoidable consequence of the inherent unpredictability of the IMF business.

Even on the low end ($400m income @ ~1.6x MOIC), i get a current book plus net cash NPV of ~$1.20 per share using a 20% discount rate, which is still ~65% of today's share price; using the bull scenario of $600m income at 2x MOIC, i get a net cash adjusted NPV of ~$1.70 per share, which just about covers the entirety of today's market cap. I don't think there are too many ASX-listed businesses out there where, even using what i think are conservative assumptions, 65% of the business' market cap is comprised of the next ~3 years of cash flows plus net cash on balance sheet.

In replying to Denk last night, i also spent a bit of time looking at the composition of the current case book, particularly the rapid case build undertaken in late 2015 (they added ~$1bn claim value across 10 cases in 4Q2015). This 4Q2015 case build is largely what's driving the forecast ~$1.6bn claim value forecast to resolve in FY18, so i looked at each case funding announcement in 2015 to see what sort of claims are in there. A couple things i picked up:

- Most of that big case build was in the US, and some of those deals (US32 @ $115m claim value, US27 @ $50m claim value) are portfolio cases rather than single pieces of litigation. I think the portfolio deals are less likely to deliver the really bad outcomes that IMF has suffered in the past on cases like bank fees & BOQ, simply because they are portfolios so there should be more reliability in profitability when spread across a number of cases.
- In addition to not having the prospect of adverse costs orders in US cases, IMF's US funding agreements are actually structured much more favorably than Aus agreements. Compare the following two statements: in Aus, "IMF does not cap its funding commitment to a case and is entitled to a prescribed percentage of any resolution," whereas in the US "IMF's investment is capped and its potential return is structured as the higher of a prescribed multiple of funds invested and a percentage of any resolution". So, not only are US investment amounts capped (to prevent big cost overruns), but IMF has the luxury of prescribing a minimum MOIC in its US funding agreements, and then we get the upside if the resolution is higher than the prescribed MOIC. So, the potential for really bad outcomes in US cases is much lower than Aus cases because we have the floor on prescribed returns to IMF, but the ceiling is uncapped. Taking all this into account would suggest that, over time, US MOICs should be noticeably higher and less volatile than Australian MOICs.