OBL is complex and hard to value. As a result I think it is very poorly covered by analysts or understood. (I have never seen a clear thesis) which is why I have been doing my numbers before the investor day on the 27th of March. I am happy to share them and if anyone has any better insight I am happy to be corrected or think about the stock in a different way.
FWIW I don't think management have done a great job for shareholders over the past few years and I have been out of the stock through a lot of this period but what attracts me to this stock is that litigation funding is an extremely lucrative industry.
OBL Economics:There is so much noise around timing of case wins that it is easy to forget the high-level economics of OBL and litigation funding. For OBL:
FY24 Commitments $625m (medium term the plan is $1b annual commitments)
MOIC 2.2 (this is the attractive part of the business)
Value created annually$750m (commitments x MOIC). This value does take time to come back to OBL.
Value sharing: IEV $562.5m 75% (assume the relationship from FY23 pie chart holds but happy to be corrected)
OBL $187.5m 25% (assume the relationship from FY23 pie chart holds but happy to be corrected)
Normalized OBL Economics:
Annual Value Created $187.5m (Comes over the next say 4 years so discount it by 20%)
Discounted Value Created $150.0m (i.e. assume you monetized the value created in the current year)
Less: OBL Costs $ 95.0m (Upfront unfortunately)
EBIT $ 55.0m
6x EBIT $330.0m (think 6x is what this business is worth). OBL takes all the risk on the cases, pays expenses upfront etc.
This is the way I believe the market is currently looking at the stock. Attractive industry but show me the money. The money is going to the IEV....so where is the opportunity?
OBL is arguably the joint top player in litigation funding (very similar to Burford which is listed on the LSX). Burford however funds the economics from its balance sheet and therefore captures all the value created (above analysis shows this would be $750m annually). Burford's market cap is 2.44b pounds or $4.76b (well over 10x the market cap today of OBL).
If Burford was able to purchase OBL it is essentially buying a platform that sources $750m of value per annum for $95m. Burford is much better placed to be able to capture that value for shareholders so the strategy would be buy OBL, decommission the funds (or let them run off) and divert all the commitments toward the balance sheet. This is exactly what BUR have done (they have already learnt that lesson) if you read their most recent letter posted below.
So to rework the economics using the BUR cost of capital the economics:
FY24 Commitments $625m (medium term the plan is $1b annual commitments)
MOIC 2.2 (this is the attractive part of the business)
Value created annually $750m (commitments x MOIC). This value does take time to come back to OBL.
Value sharing: IEV $150m 20% (assume the relationship from FY23 pie chart holds but happy to be corrected)
OBL $600m 80% (assume the relationship from FY23 pie chart holds but happy to be corrected)
Annual Value Created $600.0m (Comes over the next say 4 years so discount it by 20%)
Discounted Value Created $480.0m (i.e. assume you monetized the value created in the current year)
Less: OBL Costs $ 95.0m (Upfront unfortunately)
EBIT $385.0m
6x EBIT $2,310.0m (arguably the multiple goes up as well because the risks are more evenly shared).
Comments welcome.
(20min delay)