Monday, August 25, 2008

IMF does not want a judgment

IMF's result is roughly in line with expectations. Even the dividend is expected, having regard to their franking levels.

Nevertheless, there are substantial risks ahead- well, one substantial risk actually. The issue is pretty well covered by Alan Kohler on the Business Spectator website in May 2008.

The main opportunities ahead are concentrated in non-disclosure court actions. The company in its results presentation flagged a very important factor- funding for non-disclosure class actions cost a lot of money- we are talking $6m to $8m per action. In non-disclosure class actions, the critical issue is one between reliance and loss ie whether a litigant needs to prove that loss was actually caused by the non-disclosure. This is current law in Australia. IMF's court actions hinged critically on persuading the courts to develop the law by embracing the concept of fraud on the market ie once non-disclosure is proven, losses follow automatically without having to link them up.

In my opinion, this is a big ask in the legal circles.

Perversely, IMF does better to settle cases before judgment is handed down, rather than risks having a judgment where the court refuses to embrace the doctrine of fraud on the market, which will effectively make these class actions non-viable. The insurance company defendants will also prefer not to risks a court making a decision, and in their case, embracing the concept of fraud on the market will be disastrous for their current policies. However, the insurance companies are busily rewriting their policies to exclude this specific risk, so it is a matter of time before an insurer will push matters all the way.

Needless to say, lawyers will want to be part of a landmark case, so it is in the lawyers' interest to push the issue to obtain a court decision. As for litigant shareholders, inevitably there will be a group wanting to push matters all the way, since individually, the consequence of an adverse decision on each of them is rather small.

Therefore, the situation will fast approach a point where IMF will be forced to take matters to a full verdict. From an investment perspective, this is a major risk, given the costs and time involved in these actions. The pay-off could obviously be huge, but then, once a precedent is laid down, competition from other funders will increase in earnest.

So for the moment, it is vital to IMF not to risk a judgment on these non-disclosure class actions- it is a lose lose proposition. However, this situation will not last for long. How long? Well, the Aristocrat case is the closest to judgment, therefore 28 Aug 2008 is critical to IMF, and in my opinion, settlement is critical. The rest of the other class actions have some way to go before hearing- about 2 to 3 years on my estimation. In these 3 years, it is critical for IMF to settle all these actions, and also for other class action litigation to settle without a verdict.

If there are any readers, I would be grateful for comments.

Wednesday, August 20, 2008

Servcorp Results FY 08

Results are out today, and substantially in accordance with guidance given earlier this year.

Pleasing aspects of the results:

1. The four key expenses items as a percentage of total revenue have decreased, which is an indication of cost control.

2. Spending on Office square R & D is within budget.

3. Continued good performance from all segments except Europe.

Worrying aspects:

1. Mature floor occupancy has dropped from 85% to 84%, indication of economic slowdown.

2. Guidance of 5% only growth for profit before tax for next year, if conditions remain stable (they won't remain stable), despite a few more floors maturing, and reduced number of new floor openings next year. So they are expecting or are already experiencing soft business conditions and expect the trend to continue.

Unclear situation in respect of Office square, as to whether the investment will achieve a payback as expected by management.

The next signpost indicator will be Regus' results in a few months time.

Cashflow remains strong at $50m per year, so shares trading at 16% prospective cashflow yield. But I expect the share price will be waterlogged for some time, as management has not given any guidance of any upside expectation in the coming year.

Saturday, August 16, 2008

IMF follow up (I)

Further to my IMF long idea.

As at 17 August 2008, I note unusual activity in the stock with lots of off-market trades. The market is still waiting for confirmation by IMF of the Aristocrat setlement.

On the business front, the Federal Government has paid $50 m to Jim Selim, former CEO of Pan Pharm, in settlement of a lawsuit where Selim is alleging that the TGA wrongfully cancelled Pan Pharm's license. Readers should note that the pulling of this license probably caused the liquidation of Pan Pharm, which had a market cap of about $250 m. It also resulted in the loss of 400 jobs, plus a whole lot of losses to suppliers and customers.

I am waiting for news of massive class actions being launched against the Federal Govt, and inevitably, some of this will be funded by IMF.