Manolete Partners plc (LON:MANO), the leading UK-listed insolvency litigation financing company, has announced its unaudited results for the six months ended 30 September 2020.
Financial highlights:
· Revenue growth of 153% to £19.0m (H1 FY20: £7.5m);
· Gross profit up 44% to £9.5m (H1 FY20: £6.6m);
· Gross profits on realised cases up 440% to £4.0m (H1 FY20: £0.9m);
· EBIT up 47% to £6.6m (H1 FY20: £4.5m);
· Profit before tax up 49% to £6.4m (H1 FY20: £4.3m);
· Profit after tax up 49% to £5.2m (H1 FY20: £3.5m);
· Basic earnings per share up 49% to 11.8 pence (H1 FY20: 7.9 pence);
· Cash generated from completed cases up 45% to £4.2m (H1 FY20: £2.9m);
· Investment in cases has grown by 55% to £39.3m since 30 September 2019 (H1 FY20: £25.4m);
· Net assets of £38.7m and net debt of £5.4m consisting of drawn down loan of £8.0m net of cash balances of £2.6m as at 30 September 2020;
· £12m of HSBC Revolving Credit Facility available for utilisation, as at 30 September 2020; and
· Interim dividend proposed of 1.17 pence per share, 134% higher than 0.5 pence per share paid for H1FY20
Operational highlights:
· During H1 FY21, the number of new case investments rose by 69% to 110 (H1 FY20: 65) and was close to the total 141 new invested cases for the full twelve months of FY20;
· Ongoing delivery of realised returns: 52 case realisations in the period representing a 189% increase (18 case realisations in H1 FY20), generating discounted gross proceeds of £13.5m, a 611% increase (H1 FY20: £1.9m), over an average duration of 11.5 months;
· Large £15m case completion in September 2020 of which £4.7m is payable in cash to Manolete representing a profit of c.£4.4m. Discounting for future cashflows £9.3m has been recognised in revenue and £2.8m as gross profit;
· Average money multiple of 3.1 times for cases completed in H1 FY21;
· High level of forthcoming potential case completions, with 40 live cases scheduled over the coming weeks and months for Alternative Dispute Resolution (mediations and formal without prejudice settlement meetings) or currently the subject of settlement offers and negotiations;
· Average case duration across the full portfolio of 305 completed cases remains constant at c.11 months;
· 98% increase in live cases: 214 in process as at 30 September 2020 (108 as at 30 September 2019). 219 live cases currently as at 20 October 2020 (all excluding Cartel cases);
· 91% of live cases have been signed in the last 18 months. Only one case remains ongoing from the FY17 vintage and only two cases are outstanding from the FY18 vintage. 100% of earlier case vintages have been completed; and
· The Cartel cases continue to progress as planned, no uplift to their fair value has been made in this interim period, but this will be re-assessed at year end
Steven Cooklin, Chief Executive Officer, commented:
“These half year results evidence the strong progress we have made in the last six months. We completed 52 cases in the six-month period – that means we were completing on average two insolvency claims every single week of the six-month reporting period. That rate of execution is impressive: it is almost three-times as many cases completed than the first six months of last year and close to the 54 cases completed for the whole of the previous full financial year.
“The pipeline of new cases also continues to grow at a strong rate in the first six months. We made 110 new case investments that meet our stringent selection criteria in the first half of this financial year, 69% more than the same period last year. The Board is keeping a close watch on the effects of Covid-19 as well as the Government economic support measures and the impact these two opposing factors may have on the level of corporate insolvencies and personal bankruptcies in the short and longer term.
“We have achieved impressive triple-digit growth in revenues, and strong double-digit growth in gross profit and EBIT during the period, delivering continued outstanding investment returns yielding an average money multiple of 3.1 times (H1 FY20: 2.9 times) on the 52 completed cases (H1 FY20: 18 completed cases) with an average duration of 11.5 months (H1 FY20: 11.4 months).
“This strong momentum has continued into the second half of the year with total case completions already up to 62 as at 31 October 2020 and there are another 40 live cases scheduled for Alternative Dispute Resolution or currently the subject of serious settlement offer negotiations. Alongside favourable macro-economic trends, this granular data underpins our excitement at the prospects for the second half of the year and beyond.
“This performance reflects Manolete’s core strengths: market-leading position; operating in a specialist sector where Manolete can buy almost all cases (Manolete is not a mere passive “funder”); significant first-mover advantage and deeply embedded relationships with all key stakeholders in the Turnaround, Restructuring and Insolvency community, nurtured over our 11-year operating history.”
Chief Executive Officer’s Statement
Introduction
I am pleased to present our unaudited statements for the half year to 30 September 2020.
Manolete is the leading UK quoted company in the high growth insolvency litigation finance market, a market buoyed by favourable legislative and macro-economic tailwinds, and which plays an important role in returning funds to creditors, particularly HMRC. As these interim results clearly demonstrate, we performed strongly in the first six-month period of FY21: 52 case completions was 189% higher than the comparative period last year. We made 110 new case investments, that meet our stringent selection criteria, an increase of 69% compared to the first six months of last year (H1 FY20: 65 new case investments).
Performance
In the first half, gross profits increased 44% to £9.5m (H1 FY20: £6.6m), reflecting the record number of case completions, a record number of new case investments and the benefits of short duration case returns. Operating profit increased 47% to £6.6m (H1 FY20: £4.5m). Our business is strongly profitable: we recorded pre-tax profits of £6.4m, compared to £4.3m in H1 FY20, an increase of 49%.
Investments
Two key factors set Manolete apart in the litigation finance market: first, our ability to deliver rapid case realisation times and second, the volume of realised successful completed cases. In the first half, we completed 52 cases, resulting in discounted gross settlement proceeds of £13.7m (H1 FY20: £2.4m) with gross profit on realised cases of £4.0m (H1 FY20: £0.9m). The average money multiple on these 52 cases (H1 FY20: 18 completed cases) was 3.1x (H1 FY20: 2.9x). Money multiple is defined as the Company’s gain on a case plus the amount recovered in respect of its legal costs and initial payment to the Insolvent Estate, divided by the amount of those legal costs and the initial payment to the Insolvent Estate.
The fair value of our in-process case investments as at 30 September 2020 increased 55% to £39.3m (30 September 2019: £25.4m; 31 March 2020: £32.4m), reflecting in the main, the continued attractive case investment opportunities provided by our long-established UK-wide network of Insolvency Practitioners and insolvency lawyers who refer cases into us on a daily basis. We invested £3.3m in legal and investment costs on live cases in the first half, compared to £2.1m in the first half of the previous year.
We continue to seek a balanced case portfolio by both size and type of case. In recent periods, we have looked to move up the value chain and accept a larger proportion of higher return, higher value case investments. This strategy is well supported by the strength of our case track record and facilitated by our enhanced capital position, following the proceeds raised on the flotation in December 2018 together with the extension of our Revolving Credit Facility with HSBC.
Vintages Table
This table highlights some of the key features of Manolete’s model:
1. The fast durations of our cases (average 11 months): it is the short durations and the repeat case types (all our cases are UK insolvency and insolvency-related claims) that make the case outcomes capable of accurate estimation. Allied to the fact that Manolete owns outright the large majority of its cases (rather than acting as a funder of third-party claims with no control over the key decisions relating to those claims), this drives conversion of unrealised profits into realised profits in a consistently short timeframe.
2. High Return on Investment (ROI, calculated as Manolete profit divided by investment in case) and Money multiple (MoM, calculated as Manolete profit plus Investment in case divided by Investment in case) (long-term average 177% and 2.77x, respectively): these levels have been delivered on a consistent basis for each of the last 9.5 years and across a large and diverse number of cases.
3. Only one case remains open from the FY17 vintage and two cases from the FY18 vintage. All earlier cases are fully completed. In contrast to our listed peer group, the age of Manolete’s unrealised case portfolio is short, with 91% of live cases commencing in the last 18 months.
Case Vintages as at 20th October 2020
| FY | No. of investments | No. completed | % completion | No outstanding | Open case investments | Closed case investments | Total invested | Total recovered | Total gain | IP share | Manolete gain | Duration completed cases | ROI | MoM | |
| Vint | No | No | % total | No | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | Months | % | % | |
| 2010 | 3 | 3 | 100% | 0 | – | 52 | 52 | 28 | (24) | 10 | (35) | 7.0m | (67%) | .33x | |
| 2011 | 0 | 0 | 0% | 0 | – | – | – | – | – | – | – | 0.0m | 0% | .00x | |
| 2012 | 8 | 8 | 100% | 0 | – | 763 | 763 | 2,524 | 1,761 | 580 | 1,181 | 18.0m | 155% | 2.55x | |
| 2013 | 10 | 10 | 100% | 0 | – | 174 | 174 | 780 | 606 | 316 | 290 | 7.1m | 166% | 2.66x | |
| 2014 | 42 | 42 | 100% | 0 | – | 594 | 594 | 3,884 | 3,290 | 2,427 | 863 | 10.0m | 145% | 2.45x | |
| 2015 | 39 | 39 | 100% | 0 | – | 1,404 | 1,404 | 7,029 | 5,625 | 3,290 | 2,336 | 12.8m | 166% | 2.66x | |
| 2016 | 36 | 36 | 100% | 0 | – | 1,908 | 1,908 | 9,309 | 7,401 | 4,123 | 3,278 | 15.0m | 172% | 2.72x | |
| 2017 | 31 | 30 | 97% | 1 | 286 | 1,086 | 1,372 | 4,393 | 3,307 | 1,951 | 1,356 | 12.2m | 125% | 2.25x | |
| 2018 | 29 | 27 | 93% | 2 | 1,142 | 1,535 | 2,676 | 13,988 | 12,453 | 8,678 | 3,776 | 14.0m | 246% | 3.46x | |
| 2019 | 59 | 43 | 73% | 16 | 843 | 985 | 1,828 | 3,726 | 2,740 | 1,278 | 1,462 | 11.6m | 148% | 2.48x | |
| 2020 | 141 | 55 | 39% | 86 | 2,080 | 1,479 | 3,559 | 8,845 | 7,367 | 3,957 | 3,410 | 8.0m | 231% | 3.31x | |
| 2021 | 126 | 12 | 10% | 114 | 1,067 | 180 | 1,247 | 469 | 288 | 172 | 116 | 3.7m | 64% | 1.64x | |
| Total | 524 | 305 | 58% | 219 | 5,418 | 10,160 | 15,578 | 54,973 | 44,813 | 26,781 | 18,032 | 11.2m | 177% | 2.77x |
Note: The vintages table excludes the 22 cartel cases and is net of deductions for bad debt provisions (excluding ECL provisions)
Strategy/Team
Our strategy is to increase the number and average size of our new case investments and to complete these cases on the most optimal terms. Returns benefit our shareholders as well as the creditors of those numerous insolvent estates. We believe this will be achieved by building on, as well as expanding, the wide network of our long-established Insolvency Practitioner and Insolvency Lawyer contacts throughout the UK.
At IPO, we promised to build out the then nascent regional network of our in-house lawyers nationwide. That network is now well-established and operating with great effectiveness. We are also adding selectively to certain particularly active areas.
Dividend
The current intention of the Board is to adopt a progressive dividend policy. As outlined in our Admission Document, the Company intends to pay an interim dividend for the half year ending 30 September 2020 equal to a third of last year’s dividend. Dividends will take into account the progressive nature of the dividend policy, distributable reserves and other applicable law and the trading performance of the business.
The interim dividend to Ordinary Shareholders will be payable on 17 December 2020 to those shareholders who are on the register of members at 27 November 2020.
Impact of Covid-19
During the current Covid-19 pandemic, both our regional and London staff have operated remotely and continue to conduct mediations and meetings with external solicitors and Insolvency Practitioners via online platforms, this has allowed our business to continue without material interruption.
Outlook
The business has adjusted and traded very well through the unique challenges of 2020. The level of Government support in response to the Covid-19 pandemic has resulted in a short-term sharp reduction in the number of corporate insolvencies and bankruptcies. While we anticipate this trend will reverse in the medium term, the Board will continue to closely monitor the evolving situation and the impact on anticipated levels of litigation finance enquiries in and beyond the near term.
I would like to express my gratitude to my colleagues for all their exceptional work and the tremendous support they have given to the Company.
Steven Cooklin
Chief Executive Officer
Chief Financial Officer’s Review
I am pleased to give my review of the Company’s unaudited results for the first half year to 30 September 2020, which show strong growth compared to the first half of the previous year.
Revenue
Revenue in H1 FY21 has increased by 153% to £19.0m in comparison to H1 FY20 (£7.5m). This growth in revenue has been driven by an increase in realised income due to the completion of 52 cases in the six month period, including a significant case generating realised revenue alone of £9.3m (discounted).
The Company’s revenue is split between realised and unrealised revenue. When a case is fully completed, revenue is then recognised as realised and previously unrealised gains on that case are reversed.
Unrealised revenue was broadly unchanged at £5.4m in H1 FY21, compared to the first half of FY20 of £5.6m. This reflects the development of existing case investments, the realisation of completed cases and the increase in new case investments in the period.
At 52 case completions, the number of case realisations was up 189% in H1 FY21. These generated realised revenues of £13.5m (H1 FY20: £1.9m). This reflects the higher rate of case completions which was signalled in earlier financial reports.
Accounting standards require a value judgment to be made on cases in respect of their unrealised revenue. Analysis of fair value movements shows Manolete’s fair value estimates are close to or slightly below final realisations. A sample of 36 cases, chosen for their significant carrying value or significant increase in value over the 6 month period to 30 September are independently reviewed. Our proven extensive track record of rapidly converting unrealised into realised gains speaks to the robustness and accuracy of this important process.
H1 FY21 Realisations
There were 52 cases settled in H1 FY21 with case settlement values of between £9.3m (discounted) at the largest to £10,000 and an average settlement value of £263,206. The money multiple has averaged 3.1x with a return on capital employed of 164% on average and an average case duration of 11.5 months.
Large case completion
A significant case completed within the 6-month accounting period, at a commercial settlement of £15.0m generating a Manolete profit of £4.4m. HMRC was the main creditor on this case. The agreed schedule of payments is set over a period of time and as in accordance with IFRS 9 we have discounted the future cashflows at an appropriate discount rate resulting in recognition in our Interim accounts of £9.3m revenue and Manolete profit of £2.8m from this case. This represents a ROI of 1592% before discounting and 1019% after discounting.
Our trade receivable in relation to this case is £8.9m after we apply our ECL (general provision) to the discounted revenue figure and there is also an accrual of £6.2m held in relation to payment of the insolvent estate’s share (dependent upon the Company receiving funds), hence a net receivable of £2.7m as at 30 September 2020.
The schedule of gross payments and receipts is set out below:
| £’000 | FY21 | FY22 | FY23 | FY24 | FY25 | FY26 | FY27 | FY28 | FY29 | FY30 | FY31 |
| Gross receipts | 164 | 1,000 | 150 | 1,150 | 1,857 | 1,857 | 1,857 | 1,857 | 1,857 | 1,857 | 1,393 |
| Gross IP payments | – | (479) | (17) | (701) | (1,207) | (1,297) | (1,393) | (1,393) | (1,393) | (1,393) | (1,045) |
| Gross Manolete share | 164 | 521 | 133 | 449 | 650 | 560 | 464 | 464 | 464 | 464 | 348 |
| Cumulative gross receipts | 164 | 1,164 | 1,314 | 2,464 | 4,322 | 6,179 | 8,036 | 9,893 | 11,750 | 13,607 | 15,000 |
| Cumulative gross payments | – | (479) | (495) | (1,197) | (2,404) | (3,701) | (5,094) | (6,487) | (7,880) | (9,272) | (10,317) |
| Cumulative Manolete share | 164 | 686 | 819 | 1,268 | 1,918 | 2,478 | 2,942 | 3,406 | 3,871 | 4,335 | 4,683 |
* excludes initial IP payment and legal costs.
Cost of sales
Cost of sales comprise legal costs on realised cases and payments to Insolvent Estates on successful realisations (the Insolvent Estate’s share of the realisation) of purchased cases.
Gross profit
Gross profit grew 44% to £9.5m (H1 FY20: £6.6m). Gross profit margin decreased to 50% (H1 FY20: 89%) a reflection of the lower proportion of unrealised revenue in the period.
We analyse gross profit into the separate categories of funded and purchased cases. Our strategic preference is to purchase cases rather than fund them. Generally, our Insolvency Practitioner clients, where possible, prefer the Company to purchase cases as this gives them and the Insolvent Estate complete protection from any potential adverse costs. It also provides the Company with full operational control of the case through the litigation process.
Administrative expenses
Administrative expenses increased 32% to £2.9m in the first half (H1 FY20: £2.2m). Staff costs (due to the roll out of our UK-wide in-house legal team network) and applying our bad debt provisioning policy across a larger trade receivables balance are the principal drivers of the increase in administrative expenses. The recruitment of in-house lawyers regionally across the UK is mostly complete, taking place over FY20, and hence now at close to full cost.
Statutory operating profit before non-recurring items (Earnings Before Interest and Tax)
Operating profit before non-recurring items grew by 47% to £6.6m in the first half (H1 FY20: £4.5m) with an operating profit margin of 35% (H1 FY20 60%). This reflects the higher proportion of realised revenue with their associated cost over unrealised revenue where associated legal costs are capitalised on the balance sheet.
Finance costs
These costs comprise: the interest cost on the drawn down portion of the HSBC loan, charged at 1.75% plus LIBOR, the amortisation charge of the costs of setting up the £20m HSBC borrowing facility of £0.1m, which are being amortised over the four year life of the facility; and commitment fees of £0.1m on the unutilised portion of the £20m facility, levied at the rate of 0.7%.
Profit after tax
Profit after tax has increased by 49% from £3.5m to £5.2m. The post-tax margin is 27% in H1 FY21 (H1 FY20: 46%) reflecting the higher level of realised profits and the associated accounting treatment as noted above.
Dividend
An interim dividend is proposed equal to a third of the previous financial year’s dividend, consistent with our Admission Document.
Investment in cases
The Company was managing 237 live case investments (including Cartel cases) as at 30 September 2020, compared to 131 live cases (including Cartel cases) as at 30 September 2019, a 63% increase.
The total investment in cases amounted to £39.3m at 30 September 2020, growth of 55% from the value as at 30 September 2019 of £25.4m (31 March 2020 value of £32.4m). Investment in cases is shown at costs incurred plus valuation. Live cases are shown at fair value, based on the Company’s estimate of the likely future realised gross profit. Any material valuations are corroborated with the external lawyers working on the case who provide updated legal opinions as at the year-end and the half year-end. The Company does not capitalise any of its internal costs, these are fully expensed to the Profit and Loss as incurred. The average value per case as at 30 September 2020 was £172k, compared to £202k as at 30 September 2019.
Trade receivables and cash conversion
Trade and other receivables have increased by 266% from £4.1m to £15.0m due primarily to the completion of 52 cases including one significant case for a Net Present Value discounted revenue and trade receivable of £9.3m. Included in other receivables is a secured loan to an administrator of £0.5m; this loan is for two years and is at an attractive rate of interest and due to be repaid in July 2021 including accrued interest. The loan is secured by a senior charge on land which has been independently valued at well in excess of the loan.
We have increased the level of our expected credit loss (ECL) provision to 4% (from 2%) which is applied to all trade receivables that have not been specifically provided against. This increase has generated an additional P&L charge of £0.3m during H1 FY21.
Borrowings and loans
The Company has drawn down £8.0m of its £20.0m HSBC loan facility at an interest rate of 1.75% plus LIBOR. The Company intends to continue to use this finance to invest in new cases.
Cash flow statement – Corporation tax
We continue to utilise our cash resources to invest in new cases, with a cash investment of £3.3m in the six month period, hence generating a cash outflow at the operating level.
In the half year to 30 September 2020, a corporation tax payment of £1.0m and year-end dividend payment relating to FY20 of £1.3m were also paid out.
A summary of our cashflow or H1 FY21 in comparison to H1 FY20 is presented below:
| 6 months | 6 months | |
| H1 FY21 | H1 FY20 | |
| £’000 | £’000 | |
| Net opening cash | 8,371 | 9,692 |
| Operating cashflow for the year | 3,106 | (768) |
| Investment in new cases | (3,343) | (2,124) |
| Net cash outflow after operating and investments | (237) | (2,892) |
| Working capital | (3,135) | (413) |
| Dividends and interest payments | (1,353) | (657) |
| Corporation tax | (966) | (2,504) |
| Other cash items | (87) | (107) |
| Borrowings | – | – |
| Net cashflow movement in period | (5,778) | (6,572) |
| Net closing cash balance as at 30 September | 2,593 | 3,120 |
Mark Tavener
Chief Financial Officer
