IMPERIAL HOLDINGS INC IFT
March 12, 2012 - 2:12pm EST by
lindsay790
2012 2013
Price: 2.50 EPS $0.00 $0.00
Shares Out. (in M): 21 P/E 0.0x 0.0x
Market Cap (in $M): 53 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 53 TEV/EBIT 0.0x 0.0x

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  • Litigation
  • poor disclosure
  • Discount to Liquidation Value

Description

Imperial Holdings is a speculative investment that has a distinct possibility of a 3x return on the upside and a return of capital on the downside.  The main drivers of the outcome are:

  1. Results of the U.S. Attorney General’s Office for the District of New Hampshire investigation into the Company’s premium finance business.
  2. Results of an SEC investigation into the Company’s premium finance business and related financial reporting.
  3. Penalties that might result from the above.
  4. Costs related to third party litigation instigated by class action attorneys related to investment losses caused by the impact of the above.
  5. The impact of the above on the Company’s ability to do business in the future.
  6. The Company’s ability to manage costs through its current period of trouble.

Background

IFT went public in early 2011 at $10.75 per share.  Since then it has been all downhill.  Its businesses at the time were: premium finance for life insurance, ownership of life settlements, and finance for structured settlements.  These businesses (especially the first two) are controversial.  Take a look at the Company’s filings for details on what the business are and check out the chart for LPHI for another tale of investment woe.  Let’s fast forward:  The New Hampshire U.S. Attorney’s investigation was announced in September 2011 causing the stock to drop below $2.  The Company elected to discontinue its premium finance operations, its business of owning life settlements is in a state of flux, and its business of financing structured settlements continues, but with a new funding facility.

Current Asset Value

Book value as of September 30, 2011 was $209 million or just under $10 per share.  Of this amount, roughly $4.50 is cash and another $4.40 represents investments in life settlements.  Other assets and liabilities net out in rough terms.  Absent any big expense cuts, IFT burns through about $50 million of expenses per year or about $2.50 per share.  If you assume that accretion on the value of life settlements plus earnings from the structured settlements business can be used to offset premium payments required to maintain the life settlements then IFT’s projected book value at the end of 2012 would be around $159 million or $7.50 per share…subject to the following, admittedly hard to predict, adjustments:

  1. The New Hampshire investigation…a small (<5%) of IFT’s premium finance business was actually in New Hampshire so any settlement or penalty should be small (or even zero).  However, if the New Hampshire situation proves costly and results in action by other states, IFT could have an expensive problem.
  2. Similarly the SEC investigation may be a zero…or another expensive problem if it turns out IFT did something wrong.
  3. If the AG or the SEC find against IFT, shareholder litigation too could get expensive.

So…at a trading value of around $2.50 per share, or $53 million of total equity market capitalization, the market seems to be saying that the Company’s problems should subtract over $100 million from year end 2012 net asset value.  That just seems too high given that, at September 30, 2011, the total premium finance book was less that $50 million, only a small part of it related to New Hampshire, and no other state AGs have announced investigations.

Part of this conclusion implies that we think IFT should trade at book value…that is not an unreasonable assumption give that IFT’s businesses combined have a 15-20% ROE.  Even LPHI trades at a premium to tangible book.  The bottom line:

  1. The upside is that IFT’s problems turn out to be relatively inexpensive, it’s able to continue business on a normal basis and the stock trends to year end 2012 book value of around $7.50.
  2. We think the downside case might be that the problems turn out to cost $50 million and year end book value is more like $5.00 per share and IFT decides to liquidate…even under these circumstances one would receive considerably more than the $2.50 per share current market price.

Important (compliance) note:  We may buy or sell shares in IFT at any time.

 

Catalyst

Resolution of the AG and SEC investigations.

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