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From YE19 to 09/23 the company has absorbed £21.7m of cash, going from net cash £9.7m to net debt of £12m. The cash has been used to grow investments and absorbed into the working capital cycle.
During this period Net Assets have grown from £32.2m to £65.3m - an increase of £33.1m / or £7.35m PA. This equates to a Compound Annual Growth Rate of 17%.
Current ‘Market Value’ is £63m, it gives me comfort that the TNW is growing and is higher than current Market Value.
Trade and Other receivables (Asset)
2019 £3.8m
2023 £24.3m
Owed an extra £20.5m
Trade and Other Payables (Liability)
2019 £4.2
2023 £12.5m
Owe an extra £8.3m
Working Capital has been negatively impacted by £12.2m during this period - which explains where a significant amount of cash has been absorbed. This doesn’t overly concern me as they are undergoing an expected growth period, at some point this will plateau and cash will stop being absorbed to such a degree into the Working Capital Cycle.
‘Investments’ during this period has risen by £21.2m from £18.2m to £39.4m reflecting the increased investment and growth strategy and a good pipeline for the future. I expect this rate of growth to increase in the coming years as larger cases and more opportunities are emerging.
Within this £39.4m is £13.5m of ‘Non-Current’ assets relating to the ‘Cartel Cases’, as it was ‘Non-Current’ I presume the earliest in which they see this to be settled is H1 2025. This cash will help alleviate the current reliance on the HSBC revolving credit line / improve the net cash/debt position.
Annual realised revenue from FYE19 £7.148m to FYE23 £26.79m is an annual compound growth rate of realised revenue of 39.14% during this 4 year period.
Areas to monitor;
1. Bad Debts. £0.4m for the latest period and £1.5m FYE 03/23.
2. Increasing interest/ financing costs, at full utilisation this would equate to £2.5m per annum (this alone if paid as a Dividend would equate to a 3.8% return versus current market value). They need that Cartel money in to reduce the debt requirement in the short/medium term. If the Cartel money doesn’t arrive in the next 2 years I think they’re could have an issue with cash flow required to fuel the growth trajectory.
3. Fluctuations in ‘Case Fair Values’; For the latest 6 months they have devalued by net £2.3m equating to roughly a 8% devalue in one half year, this follows a similar net amount of £2.4m FYE 03/23 and £2.7m FYE 02/22. I hope they’re being prudent for the short term and this doesn’t become a regular trend - however a net devalue of Case Fair Values (excluding Cartel Cases) of £7.4m over the last 2 1/2 years isn’t ideal and worth monitoring and continuing to question.
4. Increasing staff and admin costs / Margins.
I’m satisfied that demand will continue to increase and they’ll be presented with bigger sized opportunities in the next few years. I’m confident of the
The £12m debt, cost of salaries and without a little divi to keep shareholders hopeful all hasn't charmed the market.
MANO are too often too bullish in their reporting. I just rechecked Refinitiv and Peel Hunt still haven't changed their (hopelessly wrong) numbers since July last year though it says they reviewed them in December. I can't see any mention of Canaccord following the stock on Refintiv - does anyone have any info on that?
There will presumably be a trading up date at the end of March but there's no guarantee there will actually be clarity on the actual numbers just more positive nosies from Cooklin. For the actual numbers we have to wait until June.
The Interim RNS of Nov17th last which was pretty positive in the light of latest economic news for UK business (terrible, which isexcellent for Manolete) and am at a totlal loss to comprehend how cheap our SP is. I knowthemarket hereis pants but I reckon these will rocket when the noxt figures come out in a few months.
It's all been one way since Tuesday last week - selling (in small numbers) at c150p.
And today.
But then there was no obvious reason why it went up before.
Don’t suppose anyone has an idea why?
Tommy - my understanding is that it is the same legal process on a small case v a bigger case. Economy of scale - roughly the same kind of work needed. Certainly the costs will be bigger but not linear. Same I believe on the initial payment: from what I have seen they pay more for a bigger case but nowhere near linear. Bit like the fees in the M&A market: you will always want to work on a £100m takeover rather than a £5m takeover because (broadly) its the same work for a much higher fee. I have heard that analogy in the Law. Makes sense to me.
Forensic, what makes you say the business is operationally geared?
Mano have said this themselves, but it’s not intuitive to me. Presumably bigger cases have bigger purchase costs, higher legal fees, etc. Plus a larger share typically goes to the estate. Where’s the gearing?
Yeah I also don’t buy the idea that IPs are raising their demands. Mano are dominant in this space, by far the most prominent and successful funder to work for. If Mano called their bluff they’d be stuck.
The definition they use of Money Multiple is:
MoM Money Multiple is the Gross Proceeds less the Insolvent Estate's share of the Net Returns, divided by the sum of the upfront payment to the Insolvent Estate and total legal costs and other expenses of the claim.
So maybe more akin to operating margin? But yes there will be costs and expenses not counted in the denominator (not clear where the IPs share goes in this equation??)
The bigger issue is that the amount of money that they are actually earning this return on is relatively small. The promise of the IPO was that it would grow rapidly but covid set that all back; so in that regard we’re back to square one.
But Streets, the same "cost of running the business" applies to a PE/VC operation.
Mano seem to be rapidly building the pipeline of cases, following the two year Covid hiatus. The business looks highly operationally geared (so overheads stay stable, rather than variable, as the gross profit increases) and they say they have added inhouse lawyers already to accommodate much higher current and forecast volume.
You are right to point to the smaller cases (a point they highlighted last week) - as the first wave of cases post Covid were the smaller zombie companies. Administrations of the bigger companies now coming through, where the margins likely to be higher.
Interesting point about Arrow but I dont know that story. If they were buying debt (rather than claims) that would be a far more competitive space than buying insolvency claims where Mano seem to be the very dominant player in their sector (eg only one voted Band 1 ever by the legal industry's Chamber Guide, that I know is well respected).
Good debate. Thanks.
Smaller case sizes - they’ve covered this pretty well; BBLs are small (but, if I understand correctly, relatively low-work, so still high margin), and larger cases (administrations) have already recovered in volume and will filter down to Mano’s caseload imminently. So this is something I’m not concerned about.
With equal respect to you Forensic505, the 100% return is not comparable to other companies' returns. It is more like a gross margin: it is what they get back from what they paid, the problem is there are then the costs of running the business to be deducted and these are rising just as returns are falling. As Tommy15 says this may be largely down to COVID delays and therefore behind us.
I think the smaller case size is a worrying trend as i should imagine the costs of running a typical case are pretty constant regardless of its actual size; but this shouldn't effect the return.
My concern would be that the Insolvency Practitioners might have read Mano's results with interest and be extracting a few more pounds per case when they sell them on. Just a thought: I have heard nothing to suggest this and it may be off the mark but I saw something similar happen to Arrow Global group who used to buy defaulted consumer debt from banks - lo and behold after it went public and the returns they were making (typically 3x MoM) the price of buying that debt rose and the returns fell.
With respect, I do not think the “trend” is the really key point here. What other company do you know that produces more than 100% return every year for 5 consecutive years? Ever ?
Even the very finest private equity investors deliver 25% on an annualised basis.
Yeah this is interesting.
Of course this period spans COVID. Presumably the MM was affected by the same factors that caused the fair-value writedown (related to your first comment on this thread). So maybe the MM will stay suppressed in the current conditions?
They have been transparent about cases taking longer during COVID, due to lockdowns, important people being ill etc. This explains why the RoI (which has a time component) has been hit by a greater proportion than the MM in your data. That should be on the way back up now that case durations are back down to their historical average.
A possible factor is the lower average case size. I'm not entirely sure about this one, but presumably there is an element of fixed cost as well as variable, and lower case sizes will mean a higher proportion of these fixed costs. Mano has explained that they are expecting to see the larger cases returning en-masse.
Another factor is inflation - inflation is already affecting their costs, fees and wages, but hasn't yet trickled down into the headline size of the claims being brought to them. Again this is another frustrating consequence of their business model (similar to paying tax on "income" long before they see any corresponding cash, etc), but there should be another reversion to the mean as the size of claims start rising.
So there are multiple factors, but yes, I agree that this is not a positive trend, and an important thing to keep an eye on.
Re Peel Hunt - who knows where they get their numbers from!
Fair comment. Also it should be reflected in the price they pay to invest in a case, so it only affects ongoing cases for which higher prices were paid.
As I've said, I'm only interested in MANO because I think it could be a good investment. One fo the problems is that it is fundamentally unforecastable. I plugged the first half numbers into my model and with a few positive tweaks I pushed FY24 EBIT up to £5m, still way short of Peel Hunt's £8m.
I also noticed, looking back on old vintage charts that the RoI and MoM returns have been coming steadily down:
2019 180% 2.8x
2020 174% 2.7x
2021 169% 2.7x
2022 153% 2.5x
2023 121% 2.2x
This is a bit concerning.
There’s possibly some truth in this, but I disagree that the issue is flying under the radar. Mano employs a “Net Worth” team - which they recent expanded - to ask and answer exactly this question, ie “will the defendant actually be able to pay us if/when we win”. So they are well aware of the issue and are doing what they can to mitigate it.
That’s not to say there won’t be some haircut that Mano has to accept if things get severely worse than they are now. But this should be offset by both the greater volume and higher headline sizes of the cases that come Mano’s way in such circumstances. Mano will still cherry pick the best cases as it does now, but from a larger pool. I expect they would be able to make hay.
And if things get so bad that Mano’s receipts all but dry up, I suspect we’ll all have bigger problems too!
There is one aspect to this business that is seldom mentioned. There is some economic momentum to it. If, for example, the economy takes a downturn and, probably more importantly, house prices fall and housing transactions dry up, then recoveries are going to be lower which obviously lowers returns. Because MANO's cases are generally quite short duration this should have only a short term effect but I definitely think it's a drag that hasn't really been talked about.
I think my last post was too flippant re. debt. Yes each incremental bit of borrowing that is then invested into cases can be justified by my argument, but it was a mistake to ignore the large amount of existing debt that was required to a) bootstrap the business and b) keep the lights on during covid.
Covenants aside, the debt pile really is going to be a drag on their bottom line because of the interest expense.
Hopefully the cash flows will keep increasing and they will be able to start meaningfully paying down this debt, as well as investing in new cases.
Of course the game changer here would be the cartel case windfall. Converting that “investment” into reduced debt will be a huge win. Keep on eye on the news around 19 Dec - the day of the appeal; hopefully there will be some positive news on this early next year. Quite a bit riding on this I feel! But again, all the recent updates re the cartel cases have been very positive, so I still feel optimism is warranted.
Again I think there is more room for optimism here.
Yeah the accounting model means taxation up front. That’s just a fact of the model, a cost of doing business. They’re borrowing at 8% and making 120%; they should be ok.
The margins are low now, but staff costs aren’t expected to increase again; the additional staff required for the higher caseload is already “priced in”. So margins should improve.
I know what you mean about the overly-optimistic updates. Personally I’m not a big fan of how the KPIs seem to change oh every update, in order to highlight the best-performing aspects of the business (ie note that eps wasn’t a KPI this time!) but then again their business has been through the wringer, and the bbl stuff is all new to them - it’s not crazy that they adjust the KPIs to match the new reality.
I get the impression that it wasn’t obvious to them that the larger administrations would take longer to pick up after covid than the smaller CVLs. This strikes me as fair enough - no-one had been through anything like covid before!
Similarly, the continuing extensions of govt anti-liquidation measures clearly came as unwelcome surprises. Not sure what else they were supposed to do here?
Plus, it’s only to be expected that he’s a bit of a salesman. Would we have been happy if he’d said “it will take us years to recover from this”? Of course not, we’d be outraged he didn’t put a more positive spin on it for the markets.
Agreed that the CFO seems a bit of a deadweight. He didn’t impress on the call.
Just noticed your well informed note here, StreetsJ. Thank you very much!
I have averaged down at least once on my holding and still they fall. I am fortunate enough to have cash coming from a recent takeover stock but do not to announce the bottom here yet, even if I miss it! So will just wait for the cash to arrive and if these drop further I may be tempted to go in again. MANO seems a hard one to read accurately. It did not look that way 3-4 years back!
My experience of MANO is that they are far too optimistic. I published a research report on them in August 2021 (so after COVID disruption was well known.) Cooklin said my numbers were far too low. I forecast, for FY22, 17.5m of revenue, 7p of EPS. And for FY23 £26m of revenue and 21p of EPS. They made £10m and 4p in FY 22 and £15m and 3p in FY23.
The tone of the statements is always bullish. The covenant breach was almost certainly due to this overoptimism
I wouldn't bother with the company if I didn't think it was interesting, but I'm far from convinced that it's out of the woods yet.
I have access to Refintiv (Reuters as was) and only peel Hunt's forecasts are there. No mention of Canaccord. According to Refintiv the Peel Hunt numbers were "reviewed" yesterday but not one of them changed. Including Revenue for FY24 of 13.8m - which is clearly nonsense as they reported £11m for the first half. And EBIT of £8m, EPS of 11.8p which both also look completely wrong in the other direction after £1.6m and 1.4p in the first half.
My guess is that Peel Hunt have lost interest (at £75m and with little or no trading it's too small for them) and Canaccord have pitched for the brokership with a very bullish report. I may be wrong, and often am.
If I was HSBC I would be taking a cautious view on value ascribed to Cartel cases when that number is put into the Loan/NA covenant ratios. That must be restricting the amount of loan that can be dran at the moment.
Perhaps selling off the o/s receivables from last year's "big case" might be an idea.
The problem with all these valuations for asset/profit purposes is that Tax has to be paid upfront. Add the o/s big case and Cartel monies and its got to be £5m on the more than £20m total. All of which has increased the bank loan and is costing 8.7%p.a.