Expansion Into US Market And Big Data Acquisition Will Optimize Future Returns

Key Takeaways

• Transitioning to asset management and U.S. market expansion could boost revenue and margins via higher fees and capital commitments.
  
• Big data and AI integration is expected to improve decision-making, optimizing margins and investment efficiency.
  
• Transitioning to asset management and entering the U.S. market involves risks that could impact revenue and profitability amid rising operational expenses.

Catalysts

Provides dispute finance and risk management services in Australia and the United Kingdom.

• Transition to an asset management business model is expected to leverage third-party funds for higher returns, potentially boosting revenue and earnings through increased management and performance fees.
  
• Expansion into the U.S. market, the largest disputes market globally, offers significant growth potential and is likely to drive an increase in committed capital, impacting future revenue and net margins positively.
  
• Acquisition of a big data and AI platform is anticipated to enhance investment decision-making, opportunity origination, and risk underwriting, which could improve net margins by optimizing investment efficiency.
  
• Strong historical track record with an 87% win ratio and 13-year returns at a 2.9x multiple could lead to increased investor confidence, driving further investments and commitments, positively influencing future revenue growth.
  
• Reduction in the interest rate on their debt facility and additional capacity provides financial flexibility, which could enhance net margins and lower finance costs moving forward.

Litigation Capital Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Litigation Capital Management's revenue will decrease by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.8% today to 33.7% in 3 years time.
• Analysts expect earnings to reach A$21.7 million (and earnings per share of A$0.21) by about February 2028, up from A$12.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

Litigation Capital Management Future Earnings Per Share Growth

Risks

• The transition to an asset management business model, while aiming to enhance returns, may impact future revenue negatively if third-party funds underperform or if there are challenges in managing these funds effectively.
  
• The entry into the U.S. market, despite its potential, carries execution risks due to its competitive nature and different legal environment, which could affect revenue growth and profitability.
  
• The dependence on performance fees, which appear significant in their balance sheet, may cause fluctuations in revenue if fewer cases are resolved successfully or if the market conditions change.
  
• The acquisition of a big data and AI platform, while offering advantages, involves risks related to integration and effective utilization, which could impact operational expenses and net margins.
  
• Increased operating expenses, such as salary increases and consulting fees, could impact net margins if not offset by corresponding revenue growth.

Valuation

• The analysts have a consensus price target of £1.841 for Litigation Capital Management based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$64.4 million, earnings will come to A$21.7 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of £0.79, the analyst price target of £1.84 is 57.1% higher.
  
• 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.