IMF (Australia) Limited (IMF)
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.
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.
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%.
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.
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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Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 11 March 2009.
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