By the way, i probably should have elaborated a little more in my prior post as to my thinking on this business' TV.
Fundamentally, your two options to put a value on IMF's future business (i.e. everything except today's litigation book) are: 1) a perpetuity, and 2) a DCF, using a fixed time frame.
The issue i have with using a perpetuity in IMF's case is that you'll probably be overstating the durability of the business, because you have to implicitly assume that they can reinvest shareholders' money into future, unknown cases at a certain return, and at a certain rate, forever. For me, that's a big stretch for a business that has really only been given a licence to operate by dint of changes in the law over the last two or so decades. Now, of course you can "compensate" for this issue by adopting more conservative assumptions in your perpetuity formula, but you're probably still overstating the terminal value of the business (at least in my eyes). If you held a gun to my head and asked me to use a perpetuity formula to derive a TV for IMF, this is broadly how i'd do it:
- Pick a year where the business stabilizes. Let's say 2020.
- Assume a constant annual rate of case investment by 2020. Given their existing infrastructure and growth trajectory, i'd say it's somewhat reasonable to expect them to put $150m out the door every year.
- Plug in a MOIC on that number. This is a huge driver of returns - you could be aggressive and say >2, which takes into account their target MOIC and potentially also encapsulates additional yield on MOIC from their funds management approach (i.e. fees for managing other people's money), or you could be more circumspect and use <2. Given increasing competition in the space and past results, i'd probably use something like 1.75.
- Given $150m annual investment and 1.75 MOIC, your approximate annual gross profit is $112m.
- Annual cost base at the moment is about ~$30m ($20m employee expenses, $10m office expenses)
- Gives NPBT of ~$82m.
- Tax of 30%, gives 'perpetual' NPAT of ~$58m p.a.
- Plug a NPAT multiple on that. I think you have to hit this hard by using a low multiple, for reasons stated (i.e. the difficulty in assuming this business has a perpetual licence to operate, constant reinvestment risk etc.). Let's say 8x, which is obviously way lower than what i'd ordinarily use for a business that has the ability to take shareholders' money and invest it at 20%+ IRRs, but you have to compensate for IMF's lack of durability and reinvestment risk somehow, and the easiest way, i think, is via the multiple you plug into the perpetuity formula.
- This would yield a TV in 2020 dollars of (58*8 = $468m); discount that back to 2017 value at ~20% p.a. yields a PV of $307m, or $1.80 per share.
So, using this approach (which i assume is what analysts do), you could easily get $2+ per share in TV just pushing the multiple on 2020 earnings (or by using a more aggressive MOIC assumption). Of course, given the value on the existing book is likely roughly ~$1.40+, this approach gives a total per share value in the region of $3.50 or higher, which is favorable versus the $2 trading price.
However, personally i'd be more comfortable running something like a 15 year DCF and just assuming there is no perpetuity value in this business. You'd just be running the same assumptions as above, but forecasting out to, say, 2030 (i.e. basically assuming the same recurring annual profit of ~$58m p.a., but only for 10-12 years instead of forever), in which case the TV is roughly half what you'd get using the perpetuity formula. Even using this more conservative approach, your TV (at the rather aggressive 20% discount rate) is about $1 per share, so that's ~$1.50 for existing book + ~$1 for future business (assuming the business vanishes from the earth in 2030).
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