Small Cap Value Report (Mon 11 April 2022) - AMGO, MANO

Good morning, it's Paul & Jack here, with the SCVR for Monday.

Agenda - 

Paul's Section:

Amigo Holdings (LON:AMGO) - FCA prefers the amended restructuring plan, but it looks like the existing equity is probably worth little to nothing, so best to steer well clear, in my opinion.

Jack's section:

Manolete Partners (LON:MANO) - profit warning as government support measures impact business more than anticipated. These measures have been fully removed now, and the group says FY23 trading has been encouraging. A large case settlement goes some way to underpinning forecasts, and there could be a catch up in insolvency cases over the next year or so, but it’s not one for me.

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Mello Monday - is tonight at 5pm. Details here.

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Explanatory notes -

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Paul's Section:

Amigo Holdings (LON:AMGO)

4.6p (Friday’s close)

Market cap £22m

Update on the Schemes of Arrangement

I’m keeping well clear of this complicated situation, because there have been previous signs that the existing equity might be worth nothing, or next to nothing, after big dilution.

Today’s update re the FCA seems positive, but these last two sentences sound ominous -

These confirmations are positive steps towards delivering the best outcome possible, given the circumstances, for our customers, creditors and other stakeholders. There remain significant obstacles to overcome, including the need for a significantly dilutive equity issue, to recapitalise the ongoing business given the requirements of the Schemes for the transfer of virtually all existing assets to the redress creditors."

My opinion - it’s not clear to me why the market is valuing existing equity at £21m, when the company has indicated that a “significantly dilutive equity issue” is needed, and that “virtually all existing assets” are going to existing creditors.

Too risky, I’d steer clear.

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Jack’s section

Manolete Partners (LON:MANO)

Share price: 215p (-5.49%)

Shares in issue: 43,694,740

Market cap: £93.9m

Trading update

A profit warning today from listed insolvency litigation financing firm Manolete, which has its full year results coming out on 24th of June.

Steven Cooklin, CEO says:

As previously announced, our business has faced challenging trading conditions caused mainly by the UK Government's temporary restrictions on insolvencies. These measures were largely ended on 1 October 2021, however, the final elements stayed in place until 31 March 2022. The impact of the final elements of these measures has had a greater than expected effect as, allied to the Omicron related operational disruptions that impacted many professionals in our sector, the number of new case enquiries did not increase at the rate expected in the final quarter of our financial year. As a result, our EBIT for the year of £5-6m is below market expectations.

159 new insolvency litigation cases were financed in the year, around 20% less than in FY21 due to the exceptional UK Government restrictions on the insolvency market, with slightly more cases signed in the second half.

On the plus side, the number of cases completed has increased and existing cases have generated record gross cash recoveries of £15.6m, up 28% year-on-year and more than double the level of FY20. The £15.6m was collected across 183 separate, which is probably better than a few large cases as it shows a more diversified portfolio of prospects.

After payments to IPs and legal costs, Manolete's retained share of this cash is up 45% to £9.7m (FY21: £6.7m).

The group expects there to be an insolvency 'catch up' effect over the next 12 months and beyond now that government measures have ended completely. New case enquiries have rebounded ‘sharply upwards’ in the last 4 weeks.

Current trading

FY23 cash recoveries have started very strongly, with a £9.5m large case settlement in the early days of April (at a money multiple of 1.9x) meaning total gross cash recoveries for the month should be in excess of £10m. That’s nearly two thirds of the FY22 total, and should leave the group with about £6.5m of net debt.

Conclusion

I believe that there is probably a structural growth opportunity for third party funders in the UK insolvency market, but the share price performance of the likes of Manolete and Burford shows that buying into that vision has not been straightforward.

Manolete’s share price is more or less back to its IPO level around three years ago.

Obviously a global pandemic and unusually high levels of government business support is a reasonable excuse for some of the underperformance, but these litigation funders still need to win over investors so the timing is quite unfortunate.

The prospects are looking brighter for Manolete heading into FY23, although it seems to be mostly the last week of March and the 11 days of April so far, which is a short time period. Previous profit warnings indicate a lack of revenue visibility in the business model, so I’m not about to annualise this small sample.

It’s quite possible, perhaps even likely, that there will be a catch up in insolvency cases here but I’ll leave that for others to decide as I haven’t spent enough time on the market opportunity and business model here. It remains outside my own modest circle of confidence, although I can see why some might be enthused by the prospects going forward.