Institutionalisation Of Legal Finance Will Support Capital Light Fee Income Expansion

Catalysts

About Omni Bridgeway

Omni Bridgeway is a global legal finance and asset management platform that funds and manages legal assets on a capital-light, institutional-grade basis.

What are the underlying business or industry changes driving this perspective?

• Further institutionalisation and consolidation of legal finance into a small set of global leaders is likely to concentrate high quality deal flow with Omni Bridgeway, supporting sustained double digit AUM growth and higher recurring fee income over time.
• Scaling of capital-light structures, including Funds 4 and 5 Series II and sidecar capital, can materially lift management and transaction fee streams without equivalent balance sheet strain, improving operating leverage and net margins.
• Execution of the transition to full fair value accounting and expanded disclosure, including enhanced data packs and vintage analysis, should narrow the current discount to book value as earnings quality and intrinsic value become clearer, supporting EPS and valuation multiples.
• Increasing cost discipline, with OpEx targets of $80 million and a pathway to 70 percent cost coverage by FY 28, positions the platform to convert portfolio growth into structurally higher operating margins and more stable free cash flow.
• Improving completion momentum on a larger, diversified portfolio, including significant judgments and settlements expected over the next 12 to 24 months, is set to convert embedded fair value into cash, driving revenue recognition, higher ROE and capacity for capital returns.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Omni Bridgeway's revenue will grow by 26.3% annually over the next 3 years.
• Analysts are not forecasting that Omni Bridgeway will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Omni Bridgeway's profit margin will increase from 398.6% to the average AU Diversified Financial industry of 17.0% in 3 years.
• If Omni Bridgeway's profit margin were to converge on the industry average, you could expect earnings to reach A$30.1 million (and earnings per share of A$0.1) by about December 2028, down from A$349.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 35.9x on those 2028 earnings, up from 1.2x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 2.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business model depends on successfully converting large legal judgments and settlements into cash, and delays, appeals or enforcement challenges on the more than USD 2.4 billion of judgments could push out or reduce expected proceeds, which would negatively impact revenue and earnings over the medium term.
• The shift to a capital light, fund management model with growing reliance on management and transaction fees assumes continued strong demand from institutional investors. Any slowdown in capital raising for Funds 4 and 5 Series II or future vehicles would constrain AUM growth and limit the scalability of fee income and net margins.
• Fair value accounting and sidecar structures embed expectations about timing and size of outcomes across a diversified portfolio. If long term legal, regulatory or macro conditions lead to lower realization multiples than the current 2.5 times track record, the company could face write downs that reduce book value, EPS and return on equity.
• The strategy to grow AUM at a double digit compound rate while holding OpEx to around AUD 80 million requires sustained cost discipline and operational leverage. Any need to reinvest heavily in talent, systems or new geographies to keep pace with industry consolidation could cause operating expenses to rise faster than fee income, compressing operating margins.
• The capital allocation framework targets maintaining 12 to 24 months of net liquidity and contemplates share buybacks when above that range. If modeled cash inflows from the 300 underlying matters are not realized due to adverse case outcomes or slower completions, management may be unable to return capital to shareholders, which would weaken the investment case built on growing free cash flow and capital returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$2.87 for Omni Bridgeway based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.0, and the most bearish reporting a price target of just A$1.73.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$177.0 million, earnings will come to A$30.1 million, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$1.49, the analyst price target of A$2.87 is 48.0% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.