IMF: A Step-Change

IMF: A Step-Change

Regular followers of the blog should be well aware of our favourable view of Bentham IMF (ASX: IMF) – see here. We are pleased with the company’s recent 2015 half-year results.

For the first six months to December 2014, Bentham IMF settled $460 million of claims, which resulted in Net Profit After Tax of $23 million. This compares with the full-year 2014 profit of $9.8 million.

We have explained in previous posts how Bentham IMF’s earnings have historically been volatile due to the uncertain nature of case settlement. Yet when analysed over the longer term, the return metrics have been relatively stable, which allows for meaningful forecasts to estimate intrinsic value.

We are becoming increasingly confident that earnings are stabilising as a result of management’s efforts to expand the scope and scale of Bentham IMF’s operations. In particular, we consider that the first half of 2015 marked a step-change in earnings potential from the United States, which IMF entered in 2011.

However, in order to achieve smoother earnings, Bentham IMF will need to maintain a claims book above $2 billion. While the company began the 2015 financial year with a claims book of $2.1 billion, it ended the first half with a claims book of $1.8 billion, as $460 million cases settled but only $221 million of new claims were funded. This has resulted in a sizeable cash balance of $135 million. It was pleasing to hear management explain that the large cash balance will be prioritised to fund new cases, rather than fund special dividends.

We have met with company executives to discuss IMF’s prospects – stay tuned for an update next week.

The Montgomery funds have been comfortable holders of Bentham IMF for quite some time, and we are pleased to see the market is now becoming aware of its prospects.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.