Member Info for Stuartrm

Simon Thompson in Investor's Chronicle rated this as a hold in last Friday's edition. According to him, Panmure Liberum downgraded the full year pre-tax loss estimate from £0.7m to £1.9m and they reined in their pre-tax profit forecast for next year from £2m to £1.2m, implying the shares are rated on a forward PE ratio of 16.

In short, no jam this year but we should get some next year, although in my view a PE of 16 seems rather optimistic for a company with IHC's recent record.

ST of the IC recommends AVG as a buy. He states "Excluding acquisitions, underlying cash profit would have been £2mn higher and adjusted pre-tax profit, which declined from £9mn to £7.3mn, would have increased a third to £12mn."

The negative that will temper any enthusiasm seems to be "Adjusted Diluted earnings per share from continuing operations was 18.5p (2023: 23.4p)". It is not clear to me what caused this, as any new operations will have been excluded from this figure.

And the 2nd part:

“ US expansion

The group’s expansion into the US market is at a relatively early stage of development as LCM will need to establish strategic partnerships with leading law firms and attorneys. It’s easy to understand the attraction.

Firstly, its scale. US law firms generate over $700bn in revenues, with 20 to 30 per cent of that sum estimated to come from disputes (litigation and arbitration).

Secondly, US lawyers are used to managing risk, with contingency fees being a widespread practice. This creates opportunities for litigation funders to establish long-term financing relationships with US law firms, so enabling capital deployment on attractive terms.

Thirdly, the US is a data-rich environment, providing a fertile ground for the application of Big Data and artificial intelligence (AI) strategies. LCM recently acquired the intellectual property of a technology platform specialising in legal analytics. It provides a powerful tool to leverage Big Data and AI-driven strategies to better identify promising investment opportunities and streamline the underwriting process. It also acts to differentiate LCM in the US market – a highly data-rich environment. The technology will be integrated across the group’s global operations, too.

2024 annual results

Volatility in case realisations is not unusual for litigation funders. The fall in LCM’s earnings last year is a case in point. However, shortly after the financial year-end, LCM concluded a bilateral investment treaty claim that generated revenue of $29.6mn for a A$5.9mn investment. Factoring in its performance fee of A$6.1mn, LCM made a A$13.5mn total return on a A$1.5mn investment with investors in the first fund retaining the balance of the proceeds. EPS would have been closer to 10p if the case had concluded in the period.

In any case, with the shares trading in line with book value, investors are taking a conservative view of future realisations, an approach at odds with LCM’s 13-year track record of delivering an impressive 2.9 times multiple on invested capital.

The share price rallied 24 per cent after I covered the annual results (‘A litigation funder on a bargain basement rating’, 19 March 2024), but has since drifted back to around the entry point in my 2019 Bargain Shares Portfolio. Buy.”

Sorry for the mistyping. Simon Thompson of Investors Chronicle. Here is the first part of the article:

“ Litigation Capital Management (LIT:95.5p), a provider of litigation financing, is continuing its transition towards an asset management model and is now looking to expand the business into the US, the largest legal finance market in the world.

LCM’s first fund (A$150mn of external capital) is fully committed, its second fund (A$291mn of external capital) is 58 per cent committed and the marketing of a third will start before the calendar year-end. All investors in the first fund invested in the second fund alongside new investors. Moreover, 45 of the 58 current investments in LCM’s portfolio have been funded through the asset management model, alongside a 25 per cent participation from the group’s balance sheet.

Expect a high level of interest in the third fund given the returns existing investors have been making. The first fund has backed 26 cases, six of which have been concluded and all with positive outcomes. The settled cases have generated an internal rate of return (IRR) of 60 per cent after costs and fees, which has enabled LCM to return 70 per cent of investors' capital.

LCM receives 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and an outperformance return fee of 35 per cent over an IRR of 20 per cent. This provides an attractive income stream to complement realisations from the directly held portfolio. Importantly, as the asset management scales, LCM’s operating expenses decline as a percentage of committed capital.”

The last paragraph of the EquityDevelopment report is interesting, viz:

"We take the opportunity to introduce forecasts for FY26 and raise our fair value to 550p/share, indicative of a FY25 EV/EBITDA of 6.7x, which remains at a significant discount to the peer group average of 10.6x."

I wonder why they seem to think that such a discount to the peer group remains appropriate. If it were to close, the share price would be nearer 870, based on their figures.

Tipped by SJ of IC. I have not got my electronic copy yet but from the flier, he seems to be enthusiastic about LIT accessing the US.

I guess that Gallmat was referring to this part of the accounts:

"The net realised gains from concluded investments of A$32.2 million was primarily driven by four successful investments, offset by one loss at trial. The four successful investments generated a combined gross profit of A$42.7 million, reflecting an aggregate MOIC of 4.7x. The loss at trial resulted in a realised loss of A$8.4 million."

Part 2

“ Financial performance improving

The business is highly operationally geared, so benefits from a rising drop through of gross profit to operating profit in a positive sales cycle. A sharp improvement in gross margin (up from 23.9 to 28.2 per cent) coupled with 14 per cent revenue growth in the six-month period boosted gross profit by a third to £16.9mn. The incremental £4.2mn gross profit earned easily covered £2mn of additional operating costs, hence the doubling of operating profit to £4.5mn.

True, financing costs increased by two-thirds to £0.5mn as the fast growing business moved into a £4.9mn net debt position, mainly due to the timing of project phasing and order intake. Mpac has £25mn of headroom across its borrowing facilities, so funding is not an issue. In any case, house broker Shore Capital expects Mpac to close the year with net cash of £3mn, up from £2.1mn in 2023.

Analysts expect profitability to continue to improve, too. First half operating margin of 7.5 per cent is forecast to increase to 9.4 per cent for the full year which, on 5 per cent higher revenue of £120m, should drive up pre-tax profit almost 50 per cent to £10.5mn. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 12. Furthermore, earnings per share (EPS) should rise 15 per cent to 44.6p on 8-10 per cent revenue growth in 2025, as analysts at Equity Development and Shore Capital predict.

Mpac’s share price is up 15 per cent since the annual results (‘Mpac’s share price has doubled – and it's still a bargain’, 18 March 2024), and has trebled in my 2018 Bargain Share Portfolio. Trading on a 2025 PE ratio of 10, the rating is still too low for a company delivering an 18 per cent return on capital employed and double-digit earnings growth. Buy.”

Part 1 on this week’s IC review;

“ Mpac (MPAC:465p), a packaging systems provider, is on course to deliver a step change in profitability this year, and beyond. The board’s strategy aims to deliver double-digit annual growth from existing businesses and achieve a sustainable double-digit return on sales, with a goal of doubling revenue over the next five years.

Bearing this in mind, year to date order intake of £59.7mn is only slightly below the prior year’s record level, a period which benefited from orders deferred due to the 2022 supply chain disruption. A key element of the growth strategy is to focus on extending the customer base with new global blue chip key accounts. It’s succeeding as Mpac secured £10.7mn of orders from four new strategic accounts and more than 30 per cent of Original Equipment orders were from new global customers. At the same time the business is increasing cross-selling into existing global customers.

Innovation is another key strategic pillar and fundamental to long-term sustainable growth given that new products create new business prospects and market opportunities. The launch of two flagship new products have been well received; 'Ostro' is a new mid-range side-load cartoner with the capacity to produce up to 180 cartons per minute, and 'Horizon' is a highly flexible platform for top-load cartoners. It offers leading performance and efficiency with an average throughput of 80 picks per minute.

Mpac is also capitalising on the opportunity in clean energy through its work on the Norwegian battery cell production line of Freyr Battery (US:FREY), a major developer of next-generation battery cell production capacity, and with Ilika (IKA), a company engaged in developing and commercialising lithium-ion batteries.”

I think you are right, as far as the short term is concerned. Longer term we can add:

Taiwan being attacked by China.

Moldova being absorbed by Russia.

Hungary leaving the EU and joining Russia, one way or another.

Peace and tranquility are unlikely to return for quite some time.

Might one presume that the market (lack of) reaction is due to the order book falling slightly relative to H1 last year, albeit the figure for last year was flattered by some delayed orders from the previous year?

Mike 33

You have provided an interesting link, from which it seems as if Philips have been working on CZT detectors for many years. An internet search I conducted revealed several references to other companies and organisations being involved in the technology, going back 10 years or more. It is perhaps encouraging that during my search using Microsoft Bing and the criterion "CZT detector" Kromek came top of the list. Also Redlan Technologies of Canada claim to be one of only two manufactures of CZT detectors. If Redlan are correct, and we know that Kromek is such a manufacturer, Philips would appear not to have anything beyond the prototype stage at present: this is implied in the link you provided. Let us hope, therefore, that Kromek can exploit its position and that scanners, using Kromek detectors, will come to market before Philips release their version .

Saxman 303

The answer to your question is likely to hang on the results of the review by the so called "skilled person". So far it seems that nothing terminal has been discovered but the company has clearly been in decline while this (incredibly protracted in my view) review has been going on. If the review results in sensible and economically viable conclusions that will actually improve things; and the company is able to implement the changes needed, regain trust and regrow the business the answer to you question is "probably yes". There are, however, a lot of "ifs" here and they are reflected in the current share price. This is likely to remain the case until next year at the earliest, based on the last "progress" report that was published on 8 August 2024.

The funding award is just over £1m, apparently, although it is unclear how much will go to TVC and how much will go to the various partners. Anyway, let us hope that it leads to a silk purse.

For further details see:

https://thevaccinegroup.com/tvg-and-partners-to-trial-new-vaccine-to-tackle-bacterial-infection-in-pigs/

My guess, which is probably no better or worse than anyone else's is that the share split should benefit the share price, although I suspect any benefit will be marginal. Although comparison of any discount between the NAV and price of PCT shares pre and post split, relative to the discount of the shares prices to NAV figures of other similar funds, might give an indication of the size of any benefit, there could still be other factors at play and it will be difficult, if not impossible, to come to any firm conclusions either way. In any event, by then the split will have taken place and the answer will be largely academic.

I am not sure why "management will need to magic up more good news to support the share price". They could, and in my view should, just concentrate on managing the portfolio well. Sentiment will change eventually and at that time, assuming that there is confidence in the NAV valuations and those valuations are on a generally rising trajectory, the share price will follow.

Project man

I agree with you in part: as you say, confidence in the NAV calculation is probably improving. In addition, I suggest, there is now confidence that the NAV will increase rather than decrease.

Billybamboozle

You may be right. I am hoping, although not confident, that they are topping up at the "correct time", if there is such a thing, while the rest of us (presumably including their earlier investments) bought in too early. Given that I have found, searching their names on the internet, several other significant investments that have been made by them, one would like to think that they are well experienced in such matters. Time will tell if their increase in their stake is a wise one.

IC Article PART TWO

Moreover, the unit is now generating revenue from its new MDXlab molecular diagnostics instrument. Based on the real-time polymerase chain reaction (PCR) method, it offers laboratories a compact single effective solution that undertakes the different steps within the PCR process. In the coming months, BATM also expects to launch a diagnostic instrument that automates the manual library preparation process for an advanced technology used for DNA and RNA sequencing and variant/mutation detection.

Forecasts point to a step change in profit

Importantly, the directors are maintaining full-year guidance in line with Shore Capital’s estimates. Analysts expect adjusted pre-tax profit to increase from $1.5mn to $2.8mn on 16 per cent higher revenue of $143mn. Furthermore, the operational leverage of the business underpins a step change in profitability in the 2025 financial year, assuming BATM can hit its 10 per cent revenue growth target.

On this basis, analysts forecast a rise in 2025 pre-tax profit from $2.8mn to $6.5mn to drive up earnings per share (EPS) by 167 per cent to 0.8¢. There is scope for earnings-accretive acquisitions, too, as the board looks to deploy net cash of $27.6mn (5p) and recycle likely proceeds from non-core disposals.

If the board can achieve next year’s estimates, then the shares are likely to re-rate. That’s because BATM is currently valued at book value parity and on a modest multiple of 6.5 times 2025 cash profit estimates of $13.4mn to enterprise valuation of $87mn. Hold.