Omni Bridgeway (OBL) | Court in a slow lane
Update: OBL released its investment portfolio update as at FY20. Major points: 1) the total estimated portfolio value (EPV), which is OBL’s estimate of gross litigation settlements before revenue share and litigation expenses, is now A$13.5bn (3Q20: A$10.5bn; 2) EPV at FY20 increases to A$15.8bn if matters that are either conditionally funded or approved for investment by OMB are included; 3) for the first time, the investment portfolio includes EPV of A$2.1bn in relation to investment fund no. 6, which now houses the business of OBE acquired in 2019; 4) unaudited FY20 gross litigation revenue cited at A$289m, which is nominally ahead of our pre-announcement forecast of A$279m; and 5) cash held on balance sheet and in investment funds at FY20 of A$210m (3Q20: A$213m) whilst OBL’s share of receivables from investment funds was A$123m (3Q20: A$50m).
FY21 timeline leakage: Although the rebound in the AUD has retarded the growth in group EPV since 3Q20, there has been significant leakage in the expected realisation of EPV in US investment funds numbers 1 and 4, which we understand is largely due to slower court processes in the US due to COVID-19. EPV realisation for investment fund no. 1 in FY21 and FY22 is now expected to be A$1,441m (prev. A$2,389m) and A$799m (prev. A$389m) respectively. EPV realisation for investment fund no. 4 in FY21 and FY22 is now expected to be A$101m (prev. A$1,840m) and A$1,550m (prev. Nil) respectively. This has the dual impact of a significant expected profit shift from FY21 to FY22 and delays to the exhaustion of third-party capital returns from investment fund no. 1, which is currently retarding OBL’s bottom line due to minority interests.
Changes to forecasts: Nominal change to FY20 EPS forecasts. Downgrade to FY21 EPS forecast by 61%, offset by a 93% increase in FY22 EPS forecast due to the leakage in EPV realisation from FY21 to FY22.
Investment view: BUY retained with revised DCF valuation of A$5.13 (prev. A$4.97) and price target of A$5.15 (prev. A$4.95). The slippage in EPV realisation from FY21 to FY22 is disappointing. However, FY21 should still be supported by the finalisation of the sizeable on-balance sheet matters in Wivenhoe and Westgem. OBL is growing at pace in terms of the new business, and it would not surprise if there is ultimately a quantum uplift in global commercial litigation flowing from COVID-19. OBL is building a relatively unique business which should become simpler to model once third-party capital priority returns have been exhausted by FY22. Click here to read full report