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IMF (Australia) Limited (IMF)

Operations

IMF (Australia) Limited (IMF) is a provider of funding for legal claims and other related services where the claim size is over $2 million. IMF has offices in Sydney, Perth and Brisbane. The company’s investment in a case is used to carry out legal action and cover any adverse costs. In return for assisting with the funding of a case, IMF is eligible for a proportion of the settlement if the outcome is successful. 

Investment opinion

IMF has performed very well over the past two years with an average EPS growth rate of over 195% p.a. The company has also yielded a three-year total investor return of 31.73% p.a. IMF has been classified by us as an Emerging Star Stock since it released its FY08 interim results on 15 February 2008. Recent share price appreciation has raised the company’s market capitalisation above our $100 million requirement and on 23 February 2009, IMF became a Star Stock. The level of litigation that the company pursues is expected to rise in the future as a consequence of the global economic slowdown. The company is also in a very stable financial position with cash on hand of $80.50 million. IMF may represent a promising yet high risk investment opportunity for the long term investor.  

Financials

IMF is in a strong position of financial health and became one of our Star Stocks following the release of its record FY09 interim results. Net operating profit before tax and significant items rose by 471.35% to $27.562 million for the period 1 July to 31 December 2008 from $4.824 million in the previous corresponding period. Pre abnormals EPS increased by 429.62% from 2.87 cents to 15.20 cents. Major contributors to the company’s record profit increase were successful litigations against Aristocrat Leisure Limited (pre-tax contribution of $21.80 million) and Downer EDI Limited (pre-tax contribution of $5.5 million). ROA also improved significantly from 13.46% to 50.16%.

Valuation

The company last closed at $0.99 which is a 30.64% discount to our valuation of $1.43 and suggests that the company is potentially undervalued at its current price. IMF is also currently offering a dividend yield of 10.10% fully franked.

Outlook

The outlook for IMF remains positive. The company is currently involved in a wide range of legal cases at various stages of proceedings. Cases include litigation against high profile defendants such as the Commonwealth of Australia (Pan Pharmaceuticals), A.B.C. Learning Centres Limited and Oz Minerals Limited. With further cases expected to settle during the second half of FY09, IMF anticipates net profit after tax for the full year FY09 to be between $20 million to $24 million. Furthermore, management believes that the company is in a strong financial position to capitalise on opportunities to fund larger cases with larger potential returns.

Warren Buffett’s famous quote “price is what you pay, value is what you get” highlights the importance of buying stocks that trade at a discount to their current valuation in order to maximise your potential for capital appreciation.

How do we value stocks?

The Lincoln Valuation is a theoretical share price value calculated by our analyst using forecast earnings figures. It is designed to give an indication of the underlying value of what we call a “Star Stock’ in relation to its current share price should the company consistently meet (or exceed) earnings forecasts.

Our valuation is calculated by using a weighted combination of commonly used valuation methods (such as capitalisation of earnings, discounted cash flow and dividend discount models).

In our example above, IMF’s share price of $0.99 is trading at a 30.64% discount to our valuation of $1.43. This suggests that when paying $0.99 for each share, you may be receiving $1.43 worth of value based on earnings forecasts.

 

 

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Important information:

Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.

This information is current as at 11 March 2009.

Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.

You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a financial product, you should obtain a copy of and consider the Financial Services Guide (FSG) before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.

Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded. Lincoln, its employees and/or its associates do not hold interests in: IMF. This position could change at any time without notice.

Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.