Manolete Partners plc (LON:MANO), the UK’s leading listed insolvency litigation financing company, has announced its audited results for the year ended 31 March 2020.
Steven Cooklin, Chief Executive Officer, commented: “We have delivered another set of strong financial and operating results, with impressive double-digit growth in revenue and EBIT during the period. We continue to deliver outstanding investment returns, yielding an average Money Multiple of 2.7x and ROI of 174% on 257 completed cases since inception.
“Despite the large expansion of the infrastructure overhead required for the rapid expansion of the business in FY20, Company net cash receipts from completed cases (after all payments to Insolvency Practitioners and lawyers’ fees on those cases) exceeded all Company overhead costs. We are currently running a record 201 live cases and foresee no requirement for any further material increase in overhead costs, so the outlook for cash generation is very positive.
“Despite the challenges of COVID-19, the activity levels within the business are at record levels, highlighted by the 47 new case investments (124% more than the same period last year) and 23 case completions (up from four in the same period last year) that the team has transacted in the first quarter of FY21. New case enquiries are also at all-time record levels, running at around double the rate we had this time last year. We entered FY21 with £8.4m of gross cash, a positive net cash balance and £12m of our HSBC Revolving Credit Facility unutilised. All these factors firmly underpin our confidence in the current and future trading performance of the business.
“With the widely reported economic disruption likely to ensue, we expect new case enquiries to increase over the foreseeable future and we will continue working to deliver outstanding returns to both insolvent estates and investors.”
Financial (statutory and non-statutory) highlights:
· Revenue increased by 36% to £18.7m (FY19: £13.8m)
· Gross profit up 43% to £14.4m (FY19: £10.1m)
· EBIT pre-exceptionals increased by 36 % to £9.8m (FY19: £7.2m)
· Profit before tax (before exceptional IPO costs of £882K in FY19) up 40% to £9.5m (FY19: £6.8m)
· Profit after tax (adjusted for exceptionals) increased by 38% to £7.6m (FY19: £5.5m)
· Diluted earnings per share up 70% to 17 pence (FY19: 10 pence)
· Proposed final dividend of 3.0 pence per share, 100% increase on FY19 final dividend of 1.49p
· Investment in cases up 78% to £32.4m (FY19: £18.2m)
· Cash generation: cash receipts from completed cases exceeded all completed case legal costs, all payments to Insolvency Practitioners on completed cases and all Company overheads in FY20
· Operating cashflows before movements in working capital pre new investments (non-statutory layout) increased to £1.2m in FY20 (FY19: £0.7m) hence cash inflows from completed cases exceeded payments to lawyers and IPs incurred on those cases and all overhead payments
· Gross cash of £8.4m and borrowings of £7.5m as at 31 March 2020 and £12m borrowings available on Revolving Credit Facility with HSBC
· 139% increase in new core investments in UK insolvency cases: 141 in FY20 (FY19: 59), excluding two Cartel Cases in FY19
· Ongoing delivery of realised returns: 54 case realisations in FY20 (on average one case realisation per week) with an average duration on those 54 cases of 11 months, generating a 10% increase in gross proceeds to £10.2m (FY19: 35 case realisations generating gross proceeds of £9.3m of Company cash income)
· ROI of 173% and Money Multiple of 2.7x from 257 completed cases since inception
· 33 cases already completed in the FY20 vintage at a Money Multiple of 4.6x
· Average case duration across the full portfolio of 257 completed cases is 12 months
· 81% increase in live cases: 152 in process as at 31 March 2020 (84 as at 31 March 2019)
· Over 200 live cases currently in process
· Roll-out of regional network completed with in-house lawyers recruited in: North West, South West & Wales, Eastern, North East, Midlands, London, Southern and Scottish regions of the UK
· New case enquiries at all-time record levels
· 47 new case investments made and 23 cases already completed in FY21 to date
A copy of the annual report and accounts will be available on the Company’s website shortly and will be posted to shareholders in due course.
Manolete has today appointed Liberum Capital Limited as joint broker to the Company.
I am pleased to report that the Company has seen excellent growth over the past year with 141 new case investments in the year to 31 March 2020.
The Company’s results reflect the strength, resilience and capabilities of the business, as it continues to increase the number and average size of new case investments through its expanding network of Insolvency Practitioners and Insolvency Lawyers throughout the UK.
The business achieved impressive growth in the year ended 31 March 2020, with revenues increasing by 36% to £18.7 million (FY19: £13.8m) and Profit before Tax growing by 61% to £9.5 million (FY19: £5.9m).
The Company has achieved this growth through its regional network of in-house lawyers, the successful deployment of the funds raised through the HSBC credit facility and the IPO, the Company’s increased public profile following the IPO and the continued hard work of the team.
We remain focused on strengthening the profile of Manolete, as we continue to increase the number and average size of cases within our insolvency litigation investment portfolio.
An important component to our strategy is to build upon our ever-growing network of established Insolvency Practitioner and Insolvency Lawyer contacts throughout the UK. We have been strengthening the team, and now have 11 high quality in-house lawyers in different regions across the UK. As a result, we have seen a significant increase in the volume of enquires.
The Board has adopted a progressive dividend policy based on a pay-out ratio of 20% of profit after tax, with one third being paid as an interim dividend and two thirds as a final dividend. For the year to 31 March 2020 the Board is proposing a final dividend of 3.00p per share. Subject to the approval of Shareholders at the Annual General Meeting on 22 September 2020, the dividend to Ordinary Shareholders will be payable on 30 September to those shareholders who are on the register of members at 11 September 2020.
The Board of Directors is committed to good corporate governance. The Company has adopted the ten principles of the 2018 Version of the Corporate Governance Code as set out by the Quoted Companies Alliance. Our arrangements are further described in our Corporate Governance Statement on pages 24 to 28. During the year the Board undertook its first formal board evaluation exercise.
The Audit Committee report on pages 29 to 30 and the Remuneration Committee report on pages 31 to 34 describe the remits and approaches of those committees to fulfilling their governance responsibilities. A statement on corporate governance is also provided on our website (https://investors.manolete-partners.com/company-information/corporate-governance).
On behalf of the Board and Shareholders I would like to thank our staff for their commitment and hard work during the year.
On 1 October 2019 we announced that Patrick Lineen decided to retire on 27 November 2019 and the Board are grateful to Patrick for assisting us through the IPO process. We are delighted to welcome Mark Tavener to the Manolete Board as Chief Financial Officer, who joined the Company and the Board on 7 October 2019.
Despite COVID-19, activity levels in April, May and June 2020 have remained strong with new case referrals of 186 compared to last year’s total of 98. The team are currently running a record 200 live cases. We are confident that our portfolio of cases will provide attractive returns for shareholders. Overall, the business is very well-positioned in the insolvency litigation financing market for long-term profitable growth.
I am pleased to report on a significant year of growth and delivery to shareholders for the financial year ended 31 March 2020.
Operational Progress since IPO on AIM
FY20 represents the Company’s first full year of trading as a publicly listed company on AIM. The proceeds from the successful IPO in December 2018 and the increased HSBC £20m Revolving Credit Facility have enabled us to rapidly expand the business.
Manolete has completed the first phase in the establishment of its proprietary UK network of in-house lawyers. We now have our own expert in-house insolvency litigators based in all key regions of the UK: North East, North West, Midlands, East of England, South and South East, South West and Wales, London and Scotland. We have an additional part-time consultant in the important Midlands market and have signed contracts for an additional part-time consultant to cover the Leeds market. Despite the network being established in a relatively short period, we are delighted to report that we have recorded a 100% retention rate for these employees. Most of the new joiners were already well known to us, having acted for us on cases prior to joining the Company.
The solicitors we have hired are all highly experienced insolvency lawyers, most were at Partner level within their respective legal practices. In time, the next stage of the regional expansion will be primarily aimed at hiring more junior lawyers to support the regional heads.
We currently have 11 in-house lawyers. We estimate each in-house lawyer can supervise around 25 live cases at any one time (as the large majority of the legal work on our cases is undertaken by external solicitors and barristers). This gives the Company capacity to manage around 275 live cases at any one time. At the time of writing we have 200 live cases, so the Company already has the infrastructure in place for its next stage of growth before any step change in the overhead base is likely to be required.
The IPO proceeds, together with our draw down of £8m of our £20m HSBC Revolving Credit Facility, has given us the financial firepower to take on a higher number of cases and larger cases, without fear of portfolio concentration risk. Our publicly listed status has also raised our profile, stature and credibility in the professional networks we operate in. As evidenced in Professor Walton’s recent report on the Insolvency Litigation Funding Sector, that we commissioned, Manolete is by far the dominant player in the Third Party Finance (‘TPF’) sector of the market, commanding a 67% market share of that segment (up from 52% in April 2016). The market as a whole, with an aggregate annual headline claim value of around £1.5bn, is still majority financed using the old ‘Conditional Fee Agreement/After The Event Insurance’ policy model. However, as Professor Walton stated, this situation is being “turned on its head” with the rapid increase in the TPF share. Further progress in this area is the core growth opportunity for the Company.
Strong Operating and Financial Performance
|Quarterly number of new enquiries|
|Quarterly number of signed cases|
Manolete has delivered another positive operating and financial performance this financial year. Operating profit increased by 36% to £9.8m (FY19: £7.2m), which was driven by the following factors.
New case investments increased by over 139% to 141 in FY20 (FY19: 59, excluding the two Cartel Cases which were purchased in FY19).
To date, we have invested in a total of 462 cases over the lifetime of the Company (262 of which have been completed – three of which are partially completed).
New case completions in FY20 were also at a high level, resulting in an 10% increase in gross proceeds from completed cases – 54 completed cases in FY20 generating £10.2m of gross proceeds (FY19: £9.3m from 35 completed cases).
This means that Manolete was completing, on average, a case every week throughout the year, which highlights the impressive speed of completion under our bespoke insolvency litigation finance model. Our strategic preference is to purchase rather than fund cases, which gives our Insolvency Practitioner clients and the insolvent estate full effective protection from any potential adverse costs, as well as providing the Company with full operational control of the case through the litigation process. However, whether funding or buying the claims, we are always working in a team with the IP and the lawyers.
Before investments in new cases, the cash receipts from older cases (predominantly from the FY18 and FY19 vintages) in FY20 exceeded all Company overhead costs as well as all payments to Insolvency Practitioners and lawyers on those closed cases. With a far greater number of cases (and generally larger cases) either recently completed or in progress, the outlook for further increased material cash generation from the portfolio appears very encouraging. In FY20 there was a step-change in overheads from £2.8m to £4.6m mainly due to the increased in-house lawyer headcount, but that now gives us the capacity to manage up to around 275 live cases (currently 200 live case) therefore we do not foresee any need for a material increase in overheads in the immediate future.
The Cartel Cases continue to progress well. Our external legal team has completed their Phase Two work and is now working to complete fully particularised claims supported by an expert economic valuation and evidence report over the next phase of work, with a view to issuing the claims in due course. The focus remains on the two particularly large Cartel Cases (CityLink and Comet) which were purchased for £100,000 and £125,000 respectively, but in both of these cases, Manolete has a 90% profit share on the claims. The other cases are much smaller and therefore our valuation of the Cartel Cases as a group is solely based on the two much larger cases at this stage. By focussing on just two cases, an additional benefit is that the legal and expert work on the lower volume of claims is considerably reduced.
The overall Cartel Cases opportunity remains highly attractive. To reflect our increased confidence in the final outcome of these cases as a group of claims, as at 31 March 2020 we have increased our carrying value of the cases to a combined £7.1m (FY19: £5m). The final outcome on the Cartel Cases is hoped to be a multiple of the carrying value, but there is still much work to do to bring these cases to final fruition.
Our investment track record, by vintage, continues to deliver outstanding results. All vintages up to and including FY16 have been completed and FY17 has only one case remaining. FY18 cases are 79% complete, as are well over half of the FY19 cases. Manolete’s model is characterised by short case durations, high ROIs (Return on Investment), exceptional Money Multiples and very high IRRs. We calculate case duration from the date we sign the investment agreement to the date the case is legally concluded.
The number of completed cases in 2020 includes three partially completed cases (a case is partially complete when we have achieved a material resolution with some but not all potential defendants).
Given the record level of new case investments, the level of unrealised profit is naturally higher than usual this year. However, the FY20 vintage (all invested since the IPO) already shows excellent returns. The 33 cases already completed have delivered £6.2m in gross recoveries which is higher than the gross proceeds of the 2019, 2018 and 2017 vintages. The completed cases from this FY20 vintage currently shows a much higher Money Multiple at 4.6x and record Return of Investment at 357%. Durations of cases remain low, all of which demonstrates the inherent robustness of the business model and the strong execution of the Company’s strategy since the IPO.
The 33 case completions of the FY20 vintage to date have generated average total recoveries of £188k per case compared to £94k per case for the FY19 vintage of 33 completed cases. This represents a 94% increase in average recovery per case, evidencing the increase in average size per case as the business continues to gain further traction and maturity in the UK insolvency litigation finance market.
During our 11 year history more than 95% of our 263 completed cases have resolved pre-trial, so it was unusual to have three trials completed on older cases (two from FY 18 and one from FY19) within the last few weeks, after the year end. This was the reason we moved our annual results reporting date. In two cases we won on all heads of claim and the awards were at or in excess of that assumed within our Fair Value calculations as at 31 March 2020. The trials of these two cases took place in May hence there is no adjustment to the year end valuation. The third case (Bright Futures) trial took place and completed during March but only ‘handed down’ its verdict on 26th June. It involved heads of claim totalling c. £7m but held at only £395k Fair Value in our balance sheet. We were only successful on one of the smaller three heads of claim. The FY20 audited accounts therefore reflect a write-down of the Fair Value and the costs associated with this case. The total adverse effect to pre-tax profits from this case are £709k. An appeal on this case is now being considered. Going forward, we expect the percentage of cases that settle pre-trial to remain at around the same historic 95% level.
Walton Report 2020
Professor Peter Walton’s (University of Wolverhampton) report: Insolvency Litigation Funding – in the best interests of creditors? examined the impact of the ‘Jackson Reforms’ on the insolvency litigation market including survey data from 173 Insolvency Practitioners.
In the report, Professor Walton said funding was now an integral and important part of the insolvency litigation market which had increased by 50% since 2015 to £1.5b per annum. He detected a substantial shift to financing cases by third parties from ‘no-win no-fee’ methods. The total claims being pursued in the third-party financing market was estimated to be in the region of £50m and Manolete Partners Plc held a 67% share of it.
COVID-19 Impact and Current Trading
As we have reported to the market, since the COVID-19 crisis emerged, the business has transitioned very well to the rapidly changing UK business operating environment. The Board took the decision to request all staff to work from home a week before the UK Government announced the national lockdown on 23 March 2020. Our regional team have always largely worked from home and the London team transitioned seamlessly. Our work lends itself particularly well to the new environment: almost all cases come to us in electronic format; our settlement meetings (Mediations and With Prejudice Settlement Meetings) easily transitioned to online video conference format and the Courts worked very hard to keep trials and hearings on track using online technologies. In common with many other UK companies, as an initial response to the crisis, to ensure that the Company had adequate liquidity to continue purchasing and funding cases at the current high rate of investment, we decided to drawdown £8m of our £20m Revolving Credit Facility.
After a brief pause in mid-March, the case referrals and new case signings bounced back strongly. In the three month period ending 30 June 2020, we received 186 new case referrals, which was 90% higher than the number of referrals for the same period in 2019 (98 case referrals). During the three month period ending 30 June 2020 we signed 47 new case investments, compared to 21 for the same period in 2019, representing a 124% increase.
In the first three months of FY21, we have completed 23 cases (four cases completed in the first three months of FY19) at an average premium of 17% over Fair Values as at 31 March 2020 (excluding Bright Futures). This represents an average of almost two case completions per week which underscores the fast duration and granular composition of the portfolio we are building. At the time of writing, we have over 200 live cases in process, compared with 84 at the end of FY19.
As many have predicted, the COVID-19 crisis is likely to lead to widespread global economic disruption. As we have said previously, we expect there will be an unavoidable knock-on effect for the UK economy and it is likely that this will lead to an increase in case referrals to Manolete in the months to come.
People and Stakeholders
I am enormously grateful to our in-house legal team and the finance and Net Worth Support team. It has been a very busy year, ending with the challenges of COVID-19. All have performed admirably and are a great credit to the Company. My special thanks go to our Head of Legal, Mena Halton, who has onboarded and supervised a much larger UK-wide in-house legal team, on top of her day-to-day case work. The Company’s excellent results are a great reflection of that work.
I would also like to record my thanks to the many Insolvency Practitioners and solicitors who refer cases to us. The majority of invested cases are from the same Insolvency Practitioner firms and it is this recurring referral network that is the core engine of the Manolete business which has been built over the last 11 years.
I am pleased we are delivering on the rapid growth plans set out at and subsequent to our IPO, as we accelerate our growth through investing in more claims, accepting higher value cases and further developing our UK regional network.
Chief Executive Officer
2 July 2020