I have really enjoyed reading your analysis, as I have found it difficult to understand the complexities of the accounting practices over the years. Thankyou.
Can I ask if Mano paid you to write this piece?
Also, do you think they may raise capital to fund new cases by issuing more shares, rather than borrowing from HSBC or someone else?
As a fund manager I am constantly analyzing companies. I share that analysis, in an easily digestible format, on Substack.
Why not? I've already done the work.
My motivation was to create an investment community of like minded people, so that we could share ideas.
Some of my best investments have come from people reaching out to me and introducing me to companies that I previously didn't know.
The population of investible companies runs to well over 7,000 and its impossible to analyze them all. So the community is a great way to find the hidden gems.
As part of my research I usually interview people at the company in question. In the case on Manolete Partners, I have spoken to the CEO many times by email, telephone and face-to-face over a coffee.
But the analysis is all independent - it is not influenced by anyone else. You will notice that I lay out the good, bad and the ugly. I don't look to paint a rose coloured picture - I tell it like it is.
That answers the first part of your question Robert.
In relation to the second, it would make no sense for the company to raise equity capital now at such a discounted share price. When the shares are trading for 30 pence on every pound of value, the last thing you want to do is give away more pounds of value in return for 30 pence of cash. May I recommend that you read: https://rockandturner.substack.com/p/henry-singleton-learn-from-the-best?utm_source=publication-search which explains this in more detail. Singleton was arguably the best capital allocator ever and it was he who inspired Buffett.
Thankyou for your clear response. More so than ever we have to question what we read on the internet, and question who is behind the story, especially if the content is ‘free’.
I question everything. As for Mano I just could not understand how every year the rhetoric coming from management seemed positive, yet Mr Market would go the other way - I had to question ‘what am I missing’, so your research gives me back some faith, that fundamentally this company is undervalued.
Manolete Partners stock traded at 72p on 20th January (last week). I published my analysis yesterday and people are starting to wake up to this fantastic opportunity. It closed at 96p today, up 33% from a week ago. This is only the start of a very long journey. In my opinion, these are a buy and hold for the long-term. My price target is over 300p, returning to where this stock traded in May 2022 (the company is far stronger today than it was back then).
Disclaimer: Not investment advice, just my opinion. Seek a professional opinion before trading.
If you are looking at long-term debt against cash on the balance sheet you are correct, although it is worth pointing out that the £12.5m has been reduced to circa £11.4m since September.
However, if you take cash and equivalents to include net current receivables and short term investments, the balance tips the other way.
The key issue is that for short term investments most companies would include government bonds and the like in which they park surplus cash to generate some return. These are highly liquid and equivalent to cash. For Manolete, their short term investments are almost certainly cases that will settle imminently, but not as liquid as a government bond so arguably not equivalent to cash.
As such, I have removed the wording "net cash" from the article to avoid confusion.
Either way, it doesn't impact the investment thesis.
"This is because the company’s auditor asked that investments in claims be recorded as cash flow from operations instead of CAPEX, as it argued that rights in litigation are considered non-depreciating assets while CAPEX is usually depreciable ... So operating cash flows look awful - presenting a false picture of the business."
Makes me wonder. You have the investments as CAPEX on the income statement. You take the bottom-line of the income statement (profit/loss before tax) and bring it over to the cash flow statement. There you add back depreciation. Where is the difference to recording investments directly in the cash flow statement as an outflow? When you have the case investments in the income statement as CAPEX, you just get a lower profit/loss before tax to carry over to the cash flow statement. You add back depreciation. The net result to operational cash flow is the same as reporting in the cash flow statement case investments directly which you substract from a higher profit/loss before tax number.
So that's my reasoning, and apparently, there's something I'm not understanding.
The bottom line of the income statement is useless because it is derived from a combination of realized and unrealized revenue due to IFRS-9 requirements. So the net income on the income statement is not cash net income at all.
You want to take that over as the starting point of your cash flow statement?
Garbage in, garbage out.
Accounting rules are becoming useless for investors and misleading. They aren't designed with investors in mind. Buffett understood this all the way back in 1986. His shareholder letter that year explained how he adjusts reported numbers to make them useful.
Take a look at the 1986 shareholder letter (you can find it with Google)
Yes, the income statement is not cash income. For that are the adjustments in the cash flow statement, including adding back depreciation. Still, as you point out, with Manolete Partners you arrive at operating cash flow losses - more cash goes out than comes in. And what I don't understand is why you say the cash flow statement is misleading and that (if I understand you correctly) the operating cash flow losses shouldn't be operating cash flow losses.
Berkshire has no operating cash flow losses, by the way. Buffett's discussion about unrealised gains/losses refers to the income statement.
Buffett expressed frustration with accounting standards in his 2023 shareholder letter. It is worth reading the way he explains this anomaly to his sister Bertie in that letter.
If you start the cash flow statement with numbers based on unrealized revenues (that may or may not materialize in future) then you have to add back more than just depreciation.
In the case of Manolete, its claims don't depreciate anyway. The investments either yield a positive return or else are written down/off. So there is no depreciation to factor in.
This is what I mean when I say that accounting standards aren't designed for this kind of business. A hard PPE asset depreciates and needs to be replaced. The depreciation charge becomes a proxy for the replacement cost.
That doesn't apply when investing in legal claims.
These are investments. So why don't they appear as CAPEX in the cashflow from investing activities, rather than operating activities?
In my mind, this is a balance sheet business. The NAV of the business compounds over time as money is invested profitably in claims and then reinvested. But even the balance sheet is problematic. Due to the profit warning in Sep 2022, the company is super prudent now in valuing its claims - so the assets are undervalued. At the same time, the liabilities relating to ongoing litigation costs are already paid but capitalized on the balance sheet until the claim settles. So those liabilities have largely been settled, meaning that the liabilities on the balance sheet are over stated. All that means that the NAV of the business is actually higher than it appears.
The accounts are just a mess - largely because of the auditor, who was replaced recently I believe - and that means that there is so much white noise in the numbers for investors to decipher that many simply give up.
I am speaking with the management of Manolete about producing a shareholder letter, similar to that at Berkshire, which speaks to the shareholders and explains the anomalies contained in the statutory reporting numbers. If investors are able to better understand the business, they are more likely to invest. Manolete are thinking about it.
Ok, I thought you considered depreciated CAPEX instead of operating cash outflow - speaking about the legal case investments - to be the solution. I misread this part of your article!
Still, I struggle with understanding your argument. You can have the case investments as CAPEX in your favourite version of an income statement (which is not the one we have now, as you point out), but this ultimately reduces the profit/loss income you carry over to the cashflow statement. So you either have the cash outflow of case investments recorded indirectly in the lower profit/loss income before tax you carry over to the cash flow statement, or directly as, as it's done now, in the cash flow statement. With, as far as I can see, the same result to the bottom line of operating cash flow: a loss.
Not saying your argument wouldn't be right; I just don't get it.
We are saying the same thing. If, whichever way you do it, you end up with a cash flow loss, despite the business being both profitable and cash generative, how useful is the cash flow statement in assessing the quality of this business?
It's a little like trying to read the accounts of a bank. They always look awful and over leveraged... but that misses the point... their business is a leveraged business.
Read that book that I mentioned earlier in this thread. It explains how useless accounting has become.
It was designed for asset heavy industrial businesses and hasn't evolved with the times. It doesn't work well for asset light software businesses nor does it work well for financial businesses such as Manolete.
If you disagree, then that's fine. Continue using those numbers. But I think you are trying to push a square peg into a round hole.
Thank you for your comments, but you miss a few key issues in your reasoning:
1. You are confusing Manolete as a mere litigation financer. It is fundamentally different. It is a niche investment firm. It doesn't fund someone else's litigation, it acquires the claim outright and owns it. This gives it full control over case management.
2. It currently borrows at just over 9% (and hopes to get that rate down when the revolving credit facility is renegotiated in June of this year). Against that, it makes 17%+ annually on its investments.
3. Most of its claims aren't funded with debt, but are merely reinvested capital being churned at that 17%+ annual growth rate - so it is compounding its own capital and not dependent on debt, thereby mitigating the impact of changing rates.
Hey James, nice piece, couple of thoughts/queries:
According to their vintage table Manolete took on 311 cases last year, if there are ~17,500 insolvencies per year that puts them at 1.8% of the total (third party funders vs no win no fee piechart is pretty misleading 🙂). With such a small share, and if they are truly being “selective” in which cases they take then I don’t understand why COVID affected them as much as it did. The FT chart you included above shows the no. of insolvencies dropping from ~17,500 to ~12,500. 12,500 still seems like a lot to select from for a company only processing hundreds a year. Why was the number of new cases signed affected as it was? This implies to me that the no. of *good* cases is actually far lower than suggested by Steven et al.
Also, I was flicking between previous results presentations and I see inconsistencies between some of the numbers given in vintage tables. For example, in the 12th October 2020 presentation ROI for 2015 is given as 153%, whilst in the most recent report ROI for 2015 is given as 166%. But all 2015 cases were complete before the company went public, so what is causing this change? Are litigants skipping out on them?
Thomas, I reached out to the CEO this morning on your behalf and asked about the ROI numbers that you queried. This was his response, verbatim, from his email:
"The answer to your RoI question is nice and easy: almost certainly we would have over-provided against one or two cases eg: we weren’t 100% confident that we would actually collect all of the settlement monies. But, in fact, we did. Or we at least collected more than we cautiously thought that we would."
If you'll excuse me for saying so, I think you have missed a critical step in your calculations.
It is important to understand that there are many insolvencies each year, but only a small number involve some kind of unlawful activity that leads to a legal claim. Most corporate officers are honest with high moral standards. Their business may simply have failed for genuine economic reasons.
So the question becomes, of the 17,500 (quoting your numbers), what percentage involve fraud or some other misfeasance that gives rise to a legal claim? Of that number, what is Manolete's share?
Hopefully this will help you better understand the numbers in my analysis and the pie chart (which was actually lifted directly from Manolete Partners' corporate reports rather than being something created by me.) If you want to gain a better understanding of the insolvency litigation market and statistical breakdown, please see the Professor Peter Walton report on the industry published in 2020 (easy to find with Google).
Covid-19 shut down the Courts, so the litigation of cases already in the Manolete pipeline were not progressing at the same rate as usual - at one time grinding to a complete halt. That being the case, Manolete had less cash flowing through the business to reinvest, hence taking on fewer cases during this period.
To make matters worse, the number of insolvencies dropped because of Government interventions which some would argue were a waste of tax payers money. But that's a political debate for another day.
The important thing is that the Courts are now fully operational, so the backlog of cases is clearing. This means that cash is becoming available to reinvest in new claims. At the same time, 2023 saw a tidal wave of insolvencies which are still at elevated levels. It's like fishing in a barrel - it's easy.
When a company becomes insolvent, let's say in 2023, administrators take control of the business and its assets. Then comes a period of forensic accounting to find if anything untoward has happened. That takes time - months or even years depending on the complexity of the business - hold this thought because it is relevant to something else I'll mention in the paragraph after next.
If officers are found to have 'stolen' money from the business, then a claim arises and that will be offered to Manolete Partners. All of this takes time. If Manolete acquires the claim, it will take about 12-13 months on average to settle the legal dispute and up to another year to recover settlement - Court orders may be granted to seize and sell assets of the malevolent officers - all this takes time. This explains the average of 24 months between the initial investment and the payback.
Coming back to the complexity of the business and the time it takes for administrators to complete their forensic accounting, this explains why the cases Manolete currently has on its books are smaller than average - the less complex insolvencies that occurred after the pandemic have been processed more quickly. Gradually, the average size of the claim is increasing and still has a long way to go (see my comments in the analysis about ARRCC). This is important because larger cases benefit from greater operational leverage and bigger margins - so the future is looking very bright for Manolete.
All of this to say that the Manolete Partners fly-wheel is spinning, but it still has a long way to go before it reaches maximum momentum. I expect that the years ahead will sequentially be better than those that came before them, both due to the power of compounding returns and the improved margins on a more attractive portfolio of larger claims.
On the question regarding the ROI numbers on the vintage table, that would need to be addressed to Mark Tavener the CFO. That is his table.
Given the above and the calamitous drop in the share price I would expect to see Directors buying shares. ... But........tumbleweed ... and some pretty hefty salaries for a company with a market cap of sweet FA.
@grumpyshareholder (aka William Jones) and @ThomasHeaven243956 great questions/observations. Here is some more detail:-
Mithaq Capital wanted to invest. This is a large Saudi family fund. Liquidity in the market is thin (average 25,000 shares a day). This wasn't enough volume for Mithaq. They wanted a more sizeable stake. The only way to make that happen would be to persuade an insider with a big stake to make some of his available. Cooklin obliged.
It wasn't a smart move. It was misunderstood by the market and that was another factor that caused investors to start bailing out, that weighed on the share price.
What you have to remember is that many companies, Manolete included, were established by people with expertise in a particular field and who grew the business to the point that it needed to raise equity financing. Suddenly they are thrown into the deep-end of running a public company with absolutely no experience. We wouldn't sit behind the wheel of a car without taking a driving lesson, but people sit behind the wheel of a public company equally ill prepared. For them it is a journey of discovery - learning by doing and from making mistakes.
The Mithaq Capital share sale was arguably a mistake as no thought was given to the perception of the public market. The other mistake that the company made early on, but swiftly corrected, was the payment of dividends - why would a company that can achieve high marginal rates of return on all reinvested capital distribute cash as dividends?
So that explains the Cooklin share sale.
Mark Taverner, the CFO, is a whole different story. For me, if someone holds themselves out as being capable of serving as a C-suite executive, helping steer a company, then they need to be entrepreneurial. Great companies, including Berkshire Hathaway and Constellation Software, require all executives to have a significant portion of their wealth invested in the business (not gifted as stock based comp). After all, if a chef isn't prepared to eat his own cooking, questions should be asked.
Coming back to Mark Taverner, most of his career was as a salaried employee of Deloitte, the accountants. He is not entrepreneurial. He just wants to do a job and pick up a pay check each month. He goes about his work dispassionately, which explains the way he has tackled the IFRS-9 challenge and why he caused the 2022 profit warning. So, unsurprisingly, when the Chairman asked him to invest in the business, he bought a derisory 500 shares. He really shouldn't have bothered. If I were the CEO, I would have replaced him there and then. Long story short, the company would benefit from a change of CFO.
Hi James - what did you make of the going concern comments in the past few annual reports? There were sizeable delays between what Cooklin had said about reneg of the HSBC facility and subsequent resolution. I feel the share price has been and is a reflection of covenant and debt service concerns. You wrote abt MANO in Dec 2022 when it was GBP2.50 or so - how do you explain the share price since, given the emergence from covid, rising insolvencies have been a tailwind.
BBL’s - I wonder if there is a political, national service aspect to this, including being driven by a board member. It is low value biz - Cooklin admits as much, but talks about additional BBL work as an opportunity. Imo it is crowding out higher value cases. And worse, they hired more staff in the same periods as taking on this lower revenue per case biz.
Thank you for the questions - I have been a shareholders since 2019 and its been a rough ride - but nothing that impacted the share price undermines the value of the business.
As I write in this deep dive, the headwind of Covid-19 has now become a strong tailwind. Case numbers are up, revenues are up and the Cartel cases are due to settle this year.
The UK saw record insolvencies in 2023, and this underpins the strong growth prospects of this company. It has a payback period of about 2 years, so the insolvencies from 2023 will start to show through this year, and more heavily next year.
Cash collections in the 6mth to Sept 2024 were at a record of around £15m. The company is paying down some of its debt. It has met all its recent debt covenants.
The Cartel windfall is conservatively estimated to be at least £15m on top of the revenue that the company is generating from its core case inventory. Almost all of that ought to be reinvested. For a company that is able to reinvest as much capital as it can access at about 17%, it has the ability to double every 4 years. That growth will be amplified by the expansion of the earnings multiple which is ridiculously low.
Shareholders have had their biblical 7 fallow years, now come the 7 bumper years.
The HSBC RCF comes to an end this summer and the company is already exploring its options - which may mean lower borrowing costs. But it currently borrows at around 9.4% and can deploy that capital at 17% returns. Not a bad situation to be in.
The BBL business was a short term thing. There is no certainty that the new Labour Government will continue to seek to recover these loans. So the whole thing may end. But it was just a small side-line. Those cases were also small whereas the company should be looking to increase the average size of the average case to benefit from stronger operating leverage. The ARRCC (average realized revenue per completed case) was £200k pre-Covid, but dropped to £81k due to the BBLs and Covid. It is now climbing to £109k and the target is £250k (the estimated average from the Walton report).
This is a unique business with the ability to compound for many years, and with very limited competition. What's better than that?
I have been covering MANO on a number of forums for a while now. Any old analysis will be incorporated into the most recent version, with the addition of new information and data that has become available since that date. When updated analysis is published, the older versions are taken off-line to avoid confusion.
In the past I knew this stock possessed the qualities to be a long term compounder, but back in 2022 it wasn't clear how long the Court backlog would take to clear following the pandemic lockdown. The surge in post Covid insolvencies had also not yet materialized. That happened in 2023 as explained here. The Cartel cases were a wild card back then, but liability has since been established with the legal precedent established by the BT and Royal Mail cases which have now been settled.
The Manolete story is even more bullish today, despite the share price having dropped 66% since 2022. To me that screams of a buying opportunity. My target price on these is over 300p. In the last week, since publishing my analysis, they have climbed from 72p to 96p (+33%) and this is only the start in my humble opinion.
Manolete is now a significant position in the portfolio that I manage because it is one of the most positive asymmetric skews I have seen in a long time.
I have really enjoyed reading your analysis, as I have found it difficult to understand the complexities of the accounting practices over the years. Thankyou.
Can I ask if Mano paid you to write this piece?
Also, do you think they may raise capital to fund new cases by issuing more shares, rather than borrowing from HSBC or someone else?
I am not paid to write my analysis.
As a fund manager I am constantly analyzing companies. I share that analysis, in an easily digestible format, on Substack.
Why not? I've already done the work.
My motivation was to create an investment community of like minded people, so that we could share ideas.
Some of my best investments have come from people reaching out to me and introducing me to companies that I previously didn't know.
The population of investible companies runs to well over 7,000 and its impossible to analyze them all. So the community is a great way to find the hidden gems.
As part of my research I usually interview people at the company in question. In the case on Manolete Partners, I have spoken to the CEO many times by email, telephone and face-to-face over a coffee.
But the analysis is all independent - it is not influenced by anyone else. You will notice that I lay out the good, bad and the ugly. I don't look to paint a rose coloured picture - I tell it like it is.
That answers the first part of your question Robert.
In relation to the second, it would make no sense for the company to raise equity capital now at such a discounted share price. When the shares are trading for 30 pence on every pound of value, the last thing you want to do is give away more pounds of value in return for 30 pence of cash. May I recommend that you read: https://rockandturner.substack.com/p/henry-singleton-learn-from-the-best?utm_source=publication-search which explains this in more detail. Singleton was arguably the best capital allocator ever and it was he who inspired Buffett.
Thankyou for your clear response. More so than ever we have to question what we read on the internet, and question who is behind the story, especially if the content is ‘free’.
I question everything. As for Mano I just could not understand how every year the rhetoric coming from management seemed positive, yet Mr Market would go the other way - I had to question ‘what am I missing’, so your research gives me back some faith, that fundamentally this company is undervalued.
Manolete Partners was named Financial Times Europe Long-Term Growth Champion 2025
Someone just brought this to my attention: https://markets.ft.com/data/announce/detail?dockey=1323-16743348-7TMKSM9MRQ6MNSII7IDFVGS3Q0
I also published a short podcast covering Manolete Partners https://rockandturner.substack.com/p/manolete-partners-golden-opportunity also available on YouTube, Apple podcasts, Spotify, and other leading podcast services.
Manolete Partners stock traded at 72p on 20th January (last week). I published my analysis yesterday and people are starting to wake up to this fantastic opportunity. It closed at 96p today, up 33% from a week ago. This is only the start of a very long journey. In my opinion, these are a buy and hold for the long-term. My price target is over 300p, returning to where this stock traded in May 2022 (the company is far stronger today than it was back then).
Disclaimer: Not investment advice, just my opinion. Seek a professional opinion before trading.
Hi James,
Comprehensive write-up but you state that Manolete has a net cash position, it doesn't.
At the Interims it had £636k of cash and £12.5m of debt giving a net debt position of £11.9m.
Patrick
Thank you for your message.
If you are looking at long-term debt against cash on the balance sheet you are correct, although it is worth pointing out that the £12.5m has been reduced to circa £11.4m since September.
However, if you take cash and equivalents to include net current receivables and short term investments, the balance tips the other way.
The key issue is that for short term investments most companies would include government bonds and the like in which they park surplus cash to generate some return. These are highly liquid and equivalent to cash. For Manolete, their short term investments are almost certainly cases that will settle imminently, but not as liquid as a government bond so arguably not equivalent to cash.
As such, I have removed the wording "net cash" from the article to avoid confusion.
Either way, it doesn't impact the investment thesis.
I am grateful that you pointed this out.
Best regards, James
"This is because the company’s auditor asked that investments in claims be recorded as cash flow from operations instead of CAPEX, as it argued that rights in litigation are considered non-depreciating assets while CAPEX is usually depreciable ... So operating cash flows look awful - presenting a false picture of the business."
Makes me wonder. You have the investments as CAPEX on the income statement. You take the bottom-line of the income statement (profit/loss before tax) and bring it over to the cash flow statement. There you add back depreciation. Where is the difference to recording investments directly in the cash flow statement as an outflow? When you have the case investments in the income statement as CAPEX, you just get a lower profit/loss before tax to carry over to the cash flow statement. You add back depreciation. The net result to operational cash flow is the same as reporting in the cash flow statement case investments directly which you substract from a higher profit/loss before tax number.
So that's my reasoning, and apparently, there's something I'm not understanding.
The bottom line of the income statement is useless because it is derived from a combination of realized and unrealized revenue due to IFRS-9 requirements. So the net income on the income statement is not cash net income at all.
You want to take that over as the starting point of your cash flow statement?
Garbage in, garbage out.
Accounting rules are becoming useless for investors and misleading. They aren't designed with investors in mind. Buffett understood this all the way back in 1986. His shareholder letter that year explained how he adjusts reported numbers to make them useful.
Take a look at the 1986 shareholder letter (you can find it with Google)
I also recommend this book: https://www.amazon.com/Accounting-Forward-Investors-Managers-Finance/dp/1119191092
Yes, the income statement is not cash income. For that are the adjustments in the cash flow statement, including adding back depreciation. Still, as you point out, with Manolete Partners you arrive at operating cash flow losses - more cash goes out than comes in. And what I don't understand is why you say the cash flow statement is misleading and that (if I understand you correctly) the operating cash flow losses shouldn't be operating cash flow losses.
Berkshire has no operating cash flow losses, by the way. Buffett's discussion about unrealised gains/losses refers to the income statement.
Buffett expressed frustration with accounting standards in his 2023 shareholder letter. It is worth reading the way he explains this anomaly to his sister Bertie in that letter.
If you start the cash flow statement with numbers based on unrealized revenues (that may or may not materialize in future) then you have to add back more than just depreciation.
In the case of Manolete, its claims don't depreciate anyway. The investments either yield a positive return or else are written down/off. So there is no depreciation to factor in.
This is what I mean when I say that accounting standards aren't designed for this kind of business. A hard PPE asset depreciates and needs to be replaced. The depreciation charge becomes a proxy for the replacement cost.
That doesn't apply when investing in legal claims.
These are investments. So why don't they appear as CAPEX in the cashflow from investing activities, rather than operating activities?
In my mind, this is a balance sheet business. The NAV of the business compounds over time as money is invested profitably in claims and then reinvested. But even the balance sheet is problematic. Due to the profit warning in Sep 2022, the company is super prudent now in valuing its claims - so the assets are undervalued. At the same time, the liabilities relating to ongoing litigation costs are already paid but capitalized on the balance sheet until the claim settles. So those liabilities have largely been settled, meaning that the liabilities on the balance sheet are over stated. All that means that the NAV of the business is actually higher than it appears.
The accounts are just a mess - largely because of the auditor, who was replaced recently I believe - and that means that there is so much white noise in the numbers for investors to decipher that many simply give up.
I am speaking with the management of Manolete about producing a shareholder letter, similar to that at Berkshire, which speaks to the shareholders and explains the anomalies contained in the statutory reporting numbers. If investors are able to better understand the business, they are more likely to invest. Manolete are thinking about it.
Ok, I thought you considered depreciated CAPEX instead of operating cash outflow - speaking about the legal case investments - to be the solution. I misread this part of your article!
Still, I struggle with understanding your argument. You can have the case investments as CAPEX in your favourite version of an income statement (which is not the one we have now, as you point out), but this ultimately reduces the profit/loss income you carry over to the cashflow statement. So you either have the cash outflow of case investments recorded indirectly in the lower profit/loss income before tax you carry over to the cash flow statement, or directly as, as it's done now, in the cash flow statement. With, as far as I can see, the same result to the bottom line of operating cash flow: a loss.
Not saying your argument wouldn't be right; I just don't get it.
We are saying the same thing. If, whichever way you do it, you end up with a cash flow loss, despite the business being both profitable and cash generative, how useful is the cash flow statement in assessing the quality of this business?
It's a little like trying to read the accounts of a bank. They always look awful and over leveraged... but that misses the point... their business is a leveraged business.
Read that book that I mentioned earlier in this thread. It explains how useless accounting has become.
It was designed for asset heavy industrial businesses and hasn't evolved with the times. It doesn't work well for asset light software businesses nor does it work well for financial businesses such as Manolete.
If you disagree, then that's fine. Continue using those numbers. But I think you are trying to push a square peg into a round hole.
Ok, thanks for sharing your thoughts. I'll put the book on my reading list!
Litigation financing is one of the toughest businesses out there, many lenders have been burnt (although not as specialist as Manolete).
You missed the number one headwind: the end of low interest rates; the business' returns are now impaired.
These income statement accounting entries and balance sheet assets need at least 2y to be realised as cash profits.
If one has a healthy hurdle rate, and thereby demands healthy CROCI, one should not overpay for such a business.
Thank you for your comments, but you miss a few key issues in your reasoning:
1. You are confusing Manolete as a mere litigation financer. It is fundamentally different. It is a niche investment firm. It doesn't fund someone else's litigation, it acquires the claim outright and owns it. This gives it full control over case management.
2. It currently borrows at just over 9% (and hopes to get that rate down when the revolving credit facility is renegotiated in June of this year). Against that, it makes 17%+ annually on its investments.
3. Most of its claims aren't funded with debt, but are merely reinvested capital being churned at that 17%+ annual growth rate - so it is compounding its own capital and not dependent on debt, thereby mitigating the impact of changing rates.
I hope this helps.
Hey James, nice piece, couple of thoughts/queries:
According to their vintage table Manolete took on 311 cases last year, if there are ~17,500 insolvencies per year that puts them at 1.8% of the total (third party funders vs no win no fee piechart is pretty misleading 🙂). With such a small share, and if they are truly being “selective” in which cases they take then I don’t understand why COVID affected them as much as it did. The FT chart you included above shows the no. of insolvencies dropping from ~17,500 to ~12,500. 12,500 still seems like a lot to select from for a company only processing hundreds a year. Why was the number of new cases signed affected as it was? This implies to me that the no. of *good* cases is actually far lower than suggested by Steven et al.
Also, I was flicking between previous results presentations and I see inconsistencies between some of the numbers given in vintage tables. For example, in the 12th October 2020 presentation ROI for 2015 is given as 153%, whilst in the most recent report ROI for 2015 is given as 166%. But all 2015 cases were complete before the company went public, so what is causing this change? Are litigants skipping out on them?
- T
Thomas, I reached out to the CEO this morning on your behalf and asked about the ROI numbers that you queried. This was his response, verbatim, from his email:
"The answer to your RoI question is nice and easy: almost certainly we would have over-provided against one or two cases eg: we weren’t 100% confident that we would actually collect all of the settlement monies. But, in fact, we did. Or we at least collected more than we cautiously thought that we would."
I hope that this answers your question.
Thomas
Thank you for your questions.
If you'll excuse me for saying so, I think you have missed a critical step in your calculations.
It is important to understand that there are many insolvencies each year, but only a small number involve some kind of unlawful activity that leads to a legal claim. Most corporate officers are honest with high moral standards. Their business may simply have failed for genuine economic reasons.
So the question becomes, of the 17,500 (quoting your numbers), what percentage involve fraud or some other misfeasance that gives rise to a legal claim? Of that number, what is Manolete's share?
Hopefully this will help you better understand the numbers in my analysis and the pie chart (which was actually lifted directly from Manolete Partners' corporate reports rather than being something created by me.) If you want to gain a better understanding of the insolvency litigation market and statistical breakdown, please see the Professor Peter Walton report on the industry published in 2020 (easy to find with Google).
Covid-19 shut down the Courts, so the litigation of cases already in the Manolete pipeline were not progressing at the same rate as usual - at one time grinding to a complete halt. That being the case, Manolete had less cash flowing through the business to reinvest, hence taking on fewer cases during this period.
To make matters worse, the number of insolvencies dropped because of Government interventions which some would argue were a waste of tax payers money. But that's a political debate for another day.
The important thing is that the Courts are now fully operational, so the backlog of cases is clearing. This means that cash is becoming available to reinvest in new claims. At the same time, 2023 saw a tidal wave of insolvencies which are still at elevated levels. It's like fishing in a barrel - it's easy.
When a company becomes insolvent, let's say in 2023, administrators take control of the business and its assets. Then comes a period of forensic accounting to find if anything untoward has happened. That takes time - months or even years depending on the complexity of the business - hold this thought because it is relevant to something else I'll mention in the paragraph after next.
If officers are found to have 'stolen' money from the business, then a claim arises and that will be offered to Manolete Partners. All of this takes time. If Manolete acquires the claim, it will take about 12-13 months on average to settle the legal dispute and up to another year to recover settlement - Court orders may be granted to seize and sell assets of the malevolent officers - all this takes time. This explains the average of 24 months between the initial investment and the payback.
Coming back to the complexity of the business and the time it takes for administrators to complete their forensic accounting, this explains why the cases Manolete currently has on its books are smaller than average - the less complex insolvencies that occurred after the pandemic have been processed more quickly. Gradually, the average size of the claim is increasing and still has a long way to go (see my comments in the analysis about ARRCC). This is important because larger cases benefit from greater operational leverage and bigger margins - so the future is looking very bright for Manolete.
All of this to say that the Manolete Partners fly-wheel is spinning, but it still has a long way to go before it reaches maximum momentum. I expect that the years ahead will sequentially be better than those that came before them, both due to the power of compounding returns and the improved margins on a more attractive portfolio of larger claims.
On the question regarding the ROI numbers on the vintage table, that would need to be addressed to Mark Tavener the CFO. That is his table.
Best regards
James
Ah, of course! I am a fool, thank you for the correction.
I hadn't fully appreciated the importance of those Court disruptions in the slowdown of cases, thank you again for reinforcing that point.
- T
Given the above and the calamitous drop in the share price I would expect to see Directors buying shares. ... But........tumbleweed ... and some pretty hefty salaries for a company with a market cap of sweet FA.
In fact Cooklin has reduced his holding down from 18% since the pandemic no?
@grumpyshareholder (aka William Jones) and @ThomasHeaven243956 great questions/observations. Here is some more detail:-
Mithaq Capital wanted to invest. This is a large Saudi family fund. Liquidity in the market is thin (average 25,000 shares a day). This wasn't enough volume for Mithaq. They wanted a more sizeable stake. The only way to make that happen would be to persuade an insider with a big stake to make some of his available. Cooklin obliged.
It wasn't a smart move. It was misunderstood by the market and that was another factor that caused investors to start bailing out, that weighed on the share price.
What you have to remember is that many companies, Manolete included, were established by people with expertise in a particular field and who grew the business to the point that it needed to raise equity financing. Suddenly they are thrown into the deep-end of running a public company with absolutely no experience. We wouldn't sit behind the wheel of a car without taking a driving lesson, but people sit behind the wheel of a public company equally ill prepared. For them it is a journey of discovery - learning by doing and from making mistakes.
The Mithaq Capital share sale was arguably a mistake as no thought was given to the perception of the public market. The other mistake that the company made early on, but swiftly corrected, was the payment of dividends - why would a company that can achieve high marginal rates of return on all reinvested capital distribute cash as dividends?
So that explains the Cooklin share sale.
Mark Taverner, the CFO, is a whole different story. For me, if someone holds themselves out as being capable of serving as a C-suite executive, helping steer a company, then they need to be entrepreneurial. Great companies, including Berkshire Hathaway and Constellation Software, require all executives to have a significant portion of their wealth invested in the business (not gifted as stock based comp). After all, if a chef isn't prepared to eat his own cooking, questions should be asked.
Coming back to Mark Taverner, most of his career was as a salaried employee of Deloitte, the accountants. He is not entrepreneurial. He just wants to do a job and pick up a pay check each month. He goes about his work dispassionately, which explains the way he has tackled the IFRS-9 challenge and why he caused the 2022 profit warning. So, unsurprisingly, when the Chairman asked him to invest in the business, he bought a derisory 500 shares. He really shouldn't have bothered. If I were the CEO, I would have replaced him there and then. Long story short, the company would benefit from a change of CFO.
I hope that this answers your question.
Hi James - what did you make of the going concern comments in the past few annual reports? There were sizeable delays between what Cooklin had said about reneg of the HSBC facility and subsequent resolution. I feel the share price has been and is a reflection of covenant and debt service concerns. You wrote abt MANO in Dec 2022 when it was GBP2.50 or so - how do you explain the share price since, given the emergence from covid, rising insolvencies have been a tailwind.
BBL’s - I wonder if there is a political, national service aspect to this, including being driven by a board member. It is low value biz - Cooklin admits as much, but talks about additional BBL work as an opportunity. Imo it is crowding out higher value cases. And worse, they hired more staff in the same periods as taking on this lower revenue per case biz.
Thank you for the questions - I have been a shareholders since 2019 and its been a rough ride - but nothing that impacted the share price undermines the value of the business.
As I write in this deep dive, the headwind of Covid-19 has now become a strong tailwind. Case numbers are up, revenues are up and the Cartel cases are due to settle this year.
The UK saw record insolvencies in 2023, and this underpins the strong growth prospects of this company. It has a payback period of about 2 years, so the insolvencies from 2023 will start to show through this year, and more heavily next year.
Cash collections in the 6mth to Sept 2024 were at a record of around £15m. The company is paying down some of its debt. It has met all its recent debt covenants.
The Cartel windfall is conservatively estimated to be at least £15m on top of the revenue that the company is generating from its core case inventory. Almost all of that ought to be reinvested. For a company that is able to reinvest as much capital as it can access at about 17%, it has the ability to double every 4 years. That growth will be amplified by the expansion of the earnings multiple which is ridiculously low.
Shareholders have had their biblical 7 fallow years, now come the 7 bumper years.
The HSBC RCF comes to an end this summer and the company is already exploring its options - which may mean lower borrowing costs. But it currently borrows at around 9.4% and can deploy that capital at 17% returns. Not a bad situation to be in.
The BBL business was a short term thing. There is no certainty that the new Labour Government will continue to seek to recover these loans. So the whole thing may end. But it was just a small side-line. Those cases were also small whereas the company should be looking to increase the average size of the average case to benefit from stronger operating leverage. The ARRCC (average realized revenue per completed case) was £200k pre-Covid, but dropped to £81k due to the BBLs and Covid. It is now climbing to £109k and the target is £250k (the estimated average from the Walton report).
This is a unique business with the ability to compound for many years, and with very limited competition. What's better than that?
I hope that helps.
Maybe I'm blind but I don't see any report about MANO from December 2022, where can I find it?
David
I have been covering MANO on a number of forums for a while now. Any old analysis will be incorporated into the most recent version, with the addition of new information and data that has become available since that date. When updated analysis is published, the older versions are taken off-line to avoid confusion.
In the past I knew this stock possessed the qualities to be a long term compounder, but back in 2022 it wasn't clear how long the Court backlog would take to clear following the pandemic lockdown. The surge in post Covid insolvencies had also not yet materialized. That happened in 2023 as explained here. The Cartel cases were a wild card back then, but liability has since been established with the legal precedent established by the BT and Royal Mail cases which have now been settled.
The Manolete story is even more bullish today, despite the share price having dropped 66% since 2022. To me that screams of a buying opportunity. My target price on these is over 300p. In the last week, since publishing my analysis, they have climbed from 72p to 96p (+33%) and this is only the start in my humble opinion.
Manolete is now a significant position in the portfolio that I manage because it is one of the most positive asymmetric skews I have seen in a long time.
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