Litcomp Aim Market Company Undervalued

There is nothing like being knocked off a bicycle by a passing car to change one’s attitude towards the compensation culture. This personal experience is one reason why Jason Smart, Managing Director of LitComp, is confident of the future of this small company that moved from Ofex to AIM in 2006.

With a share price of 45p and a market value of just £2.7m LitComp is a real minnow, but what looks like a clear case of under-valuation is supported not only by broker Daniel Stewart’s forecast of earnings per share of 10.6p for the year to March 2009, but also by the fact that the business is strongly capitalised with net cash of £3m. Even in the current market conditions this was enough to provoke a flurry of activity in the shares after the announcement of annual results last Wednesday, but there should be more to come.

First, though, let me address one item that arguably has been holding back the shares and does have a significant impact on financial projections.

This concerns LitComp’s 10% convertible loan stock. £3.151m of this is still outstanding and it must either be converted into equity or redeemed by October 31st. Given that holders can convert into shares at a price of 30p, 15p below the current share price, it would be surprising if they did not elect to do so and I understand that 48% of the loan note holders have confirmed their intention to convert.

Assuming that all do the same the number of issued shares will increase from 6.1m to 16.6m. Daniel Stewart’s 10.6p earnings forecast assumes this to be the case, and also of course allows for the savings of interest rate payments on the loan stock.

When LitComp switched to AIM in 2006 it made clear that it intended and expected to rapidly grow a subsidiary called Elite Insurance and having reported a 115% increase in revenues from this source in the latest financial year, Litcomp has certainly delivered.

Elite specialises in AEI, which is short for ‘After The Event Insurance’, and most of such ‘events’ are instances of personal injury. 1.7m people sustain injuries each year, of which 750,000 result in a claim for compensation. 70% of these injuries are from motor accidents, while the rest largely result in claims against employers or the public sector.

No win no fee... not quite

In case you ever suffer from an injury, this is typically what happens. A solicitor will agree to take your case on the basis of a success fee. In other words the solicitor will only be paid if he wins the case.

However that does not mean that the pursuit of compensation is entirely risk-free for the claimant. There will be incidental charges, such as those for medical reports, and although the solicitor will pay for these at the time, the claimant will eventually be responsible for their cost.

There is also the possibility that the claim will fail, in which case the claimant will receive no compensation and may be responsible for the other party’s costs. For these reasons claimants will usually insure themselves against having to bear unavoidable costs in the event of their action being unsuccessful.

Within this process there is another opportunity for the provision of financial services, and that is the advance of loans to solicitors which are usually conditional upon the solicitor’s client having taken out insurance. Litcomp is thinking of entering the market for the supply of finance to solicitors but for the moment is only involved in providing insurance cover for those making claims. It does not, though, confine itself to personal injury claims. It also offers insurance for those pursuing claims in other civil cases such as custody disputes and in commercial cases.

Customers here include the Inland Revenue, which is now required to show that it does not pursue claims without having regard to the cost to the tax-payer should its action be unsuccessful.

One of the reasons that Litcomp established Elite was to capitalise on the relationships that it had with solicitors through its original business, the provision of medical and psychological reports. Like another quoted company in this sector, Mobile Doctors, Litcomp is essentially an intermediary, acquiring and vetting reports that assist solicitors in presenting their cases from a panel of around two thousand specialists.

This business suffered a hiccough in 2007 when insurers challenged the payment of the intermediaries’ fees but a judgement in the case of Wollard vs Fowler ruled against the insurers. So this business is now back on track and 35% of Elite’s business come from clients of its other division.

So this is a neat business model, and one that is delivering good results. Earlier this month shares in rival provider of medical reports, Mobile Doctors, were suspended pending the announcement of a deal with another private company that would double its size. This may have some impact on the competitive landscape of Litcomp, but even so the valuation of its shares is hardly demanding especially for a business that if anything tends to benefit from tough economic times.

Regards,

Tom Bulford
for The Penny Sleuth
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

^ Back to top

LinkedIn
Twitter
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
StumbleUpon

Litcomp Aim Market Company Undervalued

LitComp: One To Watch