Hi folks,
First post here on Stockopedia…I’ve gone and read the IPO prospectus for Manolete Partners (LON:MANO) , looks like a great business, CEO has a large stake, delivered on their IPO promise, then COVID hits, 2021 and 2022 are still respectable, great revenue and profit, but what’s gone wrong in 2023? Any ideas? Will continue to investigate…
All I’ve managed to find is impact of a ‘single large case lost at trial’? All the key metrics seem to be pointing in the right direction.
The context for Manolete Partners (LON:MANO) is fundamental - how much is it worth? It floated, became flavour of the month and went up loads. Since then it seems to always manage to slightly disappoint. The CEO always gives a strong case for the business but when it comes down to hard numbers there always seems to be some delay or some disappointment or adjustment which causes a gap between rhetoric and numbers. Recovery has been delayed for longer than anticipated, or the major case loss, or investment in further capacity which will then be sufficient for the foreseeable future - but then more is required. I think it is simply that it is run by an entrepreneur.
There have also been bears complaining about cash flow etc.
This has made market participants add a discount to financial forecasts.
The underlying Q is how to value the company. Should it be treated as a trading business with real (non-financial) assets in which case it should be valued on a multiple of earnings (current P/E ratio = 38)? Or should it be treated as an investment fund and valued at between (for example) 0.9-1.1 times assets? Bear in mind that assets are regularly re-valued on the basis of their realisable value, so surely the company should be worth roughly their sum?
Book value per share is currently 91p (Stocko numbers), share price is 165p, almost double BV. I'm sure that an accountant can do a better job of dissembling the numbers but fundamentally my view is that the days of a glamour rating of say 3x assets, or arguing that it should be valued as a trading business rather than a multiple of assets are probably gone for the foreseeable future.
What could change this again? If Manolete can avoid any negative surprises for a couple of years or if Burford Capital (LON:BUR) were taken over by an investment bank with a trading business valuation applied. I don't think the latter is impossible but Burford is a very different type of business to Mano so in the event of this taking place there might not be read across. Finally, on the plus side they are in a cyclical growth market at a good point in the cycle, seem to have pretty much locked in a dominant market share and therefore have years of growth runway ahead if they can avoid accidents - perhaps that is worth a premium...
I am a holder, but as you can tell, am having doubts.
Hi Richard, Thanks for taking the time to post, really appreciate your insight with regards valuation and their inconsistency delivering against expectations.
'bears complaining about cashflow'!!
It's a fact that bulls should also be aware of too. At float Dec 2018 they had £10m of cash which they've turned into £10m of debt along with the regular breach of banking covenants.
imo they are also aggressive with the fair value valuation of their cases, writing them up significantly almost immediately which has caused them the writedown problems of the past.
I'd also say the nature of their business is to collect money from generally unscrupulous individuals so the receivables aren't assured of being collected.
I think the cash flow issue is key. You said in your original post “All the key metrics seem to be pointing in the right direction.” It depends of course what you think those are, but for me a key metric is the ability reliably to turn profits into cash.
Until now, in every year but one, Manolete Partners (LON:MANO) has reported a positive profit but negative free cash flow. What does this say about the reality of the profits? A year or two of cash outflows is fine, while the company builds up a book of live cases, but they have had long enough now to do this. That’s why I wouldn’t invest in this company.
There’s definitely a bull case to be made:
Despite all that I still think it is too expensive even now. I suggest asking yourself two questions:
PS I always think those are good questions to ask of any share, not just Manolete Partners (LON:MANO)
Wishing you all the best for your investments in 2024.
Ha ha. I didn't mean only bears are aware of cash flow just that (almost by definition) it is the bears who are unhappy about it.
My view is that with the nature of their generally small, relatively short case duration of 11-12 months sucking in cash is inherent in their business model.
If they were a manufacturer then they'd need capex and for Manolete Partners (LON:MANO) I'd rather it be debt than equity.
The only way to avoid net cash outflows is to act as a fund manager for others capital and this niche market currently strikes me as too small for that to be sensible.
The other Q that arises are whether costs might simply be too high. I've struggled to get to grips with that one
If anyone else can give their views (with numbers) then I'll be grateful
Richard,
With respect your thesis regarding investing in cases of duration lasting 11-12 months would cause negative cashflow over 5 years make no sense. The profit from the short duration cases should be effectively re-cycled several times through the period creating a nicely cash generative business. That has not happened at Manolete Partners (LON:MANO) .
A (slightly extreme) example (from memory so dates may be off)
MANO had a large case where they wrote up the fair value gains in 2019 so booked a chunk of profits then, the case was subsequently won and a payment plan agreed where the cash is due to be paid to MANO in installments out to 2030. That's some offset between the profit being booked and the cash flowing in.
In the legal funding field there is loads of discretion in how you book fair value gains and it's my view that Manolete Partners (LON:MANO) have chosen to place themselves at the aggressive end of the spectrum.
Thanks for sharing Whitbourne, and guess you flag my lack of depth in analysis, I hadn’t looked much further than growing revenue, growing ‘profits’, growing cases, manageable debt; you make good points with regards negative cashflow and high valuation.
Perhaps a case of heart over head, I really liked the ’story’ to the business. A disruptive business model, establishing a market leading position (acquisition target?), survived a very difficult period (ban on insolvencies shortly after floating), compound effect of case growth, CEO is heavily invested, also of an age where he might be looking for an exit in the next decade. Perhaps I need to trust the stock rank :)
I need to take another look but my view remains that when your main business tool is cash - ie to invest in new cases and you are growing fairly fast (and yes I know there have been ups and downs but one can't legislate for covid and the overheads are fixed) then you will by definition be cash negative as you grow. The key is whether, when growth stops you can keep costs sufficiently low (ie be ruthless with staff levels) to be very cash generative . The jury is out on that one.
I really think that in principle they are a decent business in a good niche. It is just a case of valuation. Is it worth a substantial premium to 1x assets ie the value of cases minus debt.
I don't yet know the answer (and bought higher).
