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Good summary and investment rationale. I hold both JKL and IMF....

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58 Posts.

25/01/16

12:17

Post #: 16863387
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Originally posted by ambitious.1 ↑

Will start to post some thoughts and information on JKL here.

In very summarised terms:

JKL is led by Philip Kapp, one of the top corporate lawyers in Australia and incredibly well connected in the corporate world. Two businesses: litigation funding and disbursement funding. While many will compare JKL to IMF, a better comparison is Burford Capital.

Litigation funding: JKL focus on corporate litigation and have a JV with the large and established US-based Longford Capital, which gives them far more financial backing than the market is realising. They are currently funding 2 cases worth ~A$800m. Both these cases have a good chance of concluding in the next 6-12 months, with settlement being the most likely outcome. A win in either case could be worth tens of millions of dollars for JKL, and the market is not factoring that in at all, though it is difficult to predict the exact outcome.

Disbursement funding: JKL recently completed the acquisition of MML, a leading provider and funder of medical and expert reports for common law personal injury cases. This market is absolutely booming in the US, but there is no one doing it at scale in Australia. JKL have an enormous opportunity to lead the way in this market.

MML did $4.1m EBIT in FY15, all internally funded (no debt). Under JKL they have access to a $20m debt facility, plus the ~$1m/month the business is collecting. That is more than enough capacity to double revenue in the first year under JKL. Doing so would mean EBIT of ~$8m from this business.

So you have the litigation funding business that could deliver tens of millions in revenue off long duration assets (or could of course have no wins, the outcome is difficult to predict and we are reliant on management's ability to select cases successfully). And then the disbursement funding business that is profitable, growing, provides recurring cash flows and has a real opportunity to double revenue and earnings in the first year under JKL.

What would you pay for such a business? I suggest it is a lot more than the current $28m market cap of JKL.

I think JKL is worth well over double current prices assuming growth of MML but no immediate success in the litigation funding business. If one of the two cases are successful that valuation will end up being a lot higher.

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Good summary and investment rationale.

I hold both JKL and IMF. JKL on the basis of the disbursement funding business with the added optionality of litigation success. Cognisant though that the optionality is not "free", there is the potential downside of JKL losing its first case and having costs awarded against it. In the context of 2 outstanding cases and current business size, this could be significant. However I regard this outcome as unlikely in the short term as it would have to go to court (i.e. no settlement) and exhaust that process. Meanwhile, you still have the opportunity of a settlement in the other outstanding case. Notwithstanding my inability to forecast legal outcomes, I'm happy to take this risk-reward equation.

JKL Price at posting: 22.0¢ Sentiment: Buy Disclosure: Held
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0 Great analysis

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