Manolete Partners update: Record Volume of Case Completions
The company has turned a corner and is now growing rapidly
On March the 27th I wrote a report on Manolete Partners (LON: MANO), since then the stock price has risen 25%. Back in March I argued that the end of the insolvency ban in the UK, together with all-time highs in corporate bankruptcies meant that Manolete had strong tailwinds.
The company published a trading update on April the 18th. In this update the company reported the following:
1. The business is profitable.
2. There were new case investments.
3. Case completions are running at record highs.
4. Cases are getting larger, which reflects that larger bankruptcies (Administrations in insolvency lingo) are picking up pace.
To quote Steven Cooklin (CEO) in the update: “Insolvency Service statistics from January 2024 show the number of Creditor Voluntary Liquidations [Medium and small firm insolvencies], the largest constituent part of the UK insolvency market, in 2023 was at its highest level since 1960.”
He continued: “These factors led to a substantial and sustained rebound in the number of Manolete’s case enquiries and new case investments in the first half of the current financial year. That trend has continued into the second half, which has also seen a return of significantly larger value case investment opportunities [Administrations, larger companies going into insolvency]”
Google finance.
UK economy
In February, the UK economic inactivity rate for those aged 16 to 64 years was 22.2%, which means about 275,000 more people than a year ago. And there was a fall of 156,000 in the number of people in employment in the last quarter to the end of February in comparison to the previous one.
Regarding economic growth, since the start of the coronavirus pandemic in early 2020, Britain's economic performance has been the weakest among the Group of Seven (G7) economies, except for Germany. The business environment is deteriorating rapidly as in 2022 British business investment was slightly lower than its level in 2016, a contrast with other G7 economies that experienced a 14% average increase during the period.
Middle-income people in Britain are 20% poorer than their peers in Germany and 9% poorer than those in France, according to a report published in December by the Resolution Foundation, the Centre for Economic Performance, and the Nuffield Foundation. And real household disposable income is on course to fall between one British national election and the next for the first time since at least the 1950s. This is reflected on my previous report in which I mentioned that bankruptcies among lower income households were at all-time highs.
Britain's public debt levels, like those of many other countries, rocketed due to the massive costs of the COVID pandemic and the energy price surge. Projections from the International Monetary Fund show it will keep on rising as a share of GDP. Unlike Germany, which is projected to lower public debt.
Floods have been threating farms and livestock across England in the past few months. These have caused massive losses among farmers. The government has launched a Farm Recovery Fund to offer compensation for farmers, however insolvencies may rise in this sector due to the floods. The BBC has in fact reported “Food security [is] threatened by extreme flooding”.
L. Slater.
As a result of all these figures, I expect the record high insolvency indicators to keep getting worse. This will bring more opportunities to Manolete and investments of a larger size as the trading update already reports.
Deep dive into the details
Manolete Partners. Investor presentation. Own estimates.
In FY2024 the company made 311 new case investments, a new record, 18% higher than in 2023, the previous record. To put this into perspective: Manolete has made 1,386 investments since inception in 2010 (including the data from the trading update); this means that just in 2024 Manolete has made over 26% of its total amount of investments ever. A truly astonishing level of growth.
In terms of new case enquiries (new opportunities offered to Manolete), they have jumped from 692 in 2023 to 731 in 2024. Bear in mind these figures ignore the pilot program with Barclays which brings ample business volume to Manolete. If we were to include the Barclays numbers, the volume increase in business would be even larger.
What´s more promising is that the case completions have reached a record high at 251 cases, 31% higher than in 2023. However, the revenue has decreased as in 2023 Manolete got a one-off large case completion of £4.9m (Manolete share of a funded case). Revenue was also lower due to a lower average revenue per case at £96k. The lower revenue per case is due to the sheer amount of small business that went bust during Covid. However, once the size of the claims goes back to pre-COVID levels, we may see average revenue per case of £180k, double the amount obtained in 2024.
Going back to the pilot program with Barclays, Manolete has achieved a 63% completion rate on the recovery of the Bounce Back Loans issued by Barclays. To put this figure into perspective: traditional debt collection agencies used by various banks have average less than 1% recoveries. The “know how” of Manolete is truly a textbook definition of moat: a durable competitive advantage for Manolete. This may merit an increase in price target once we get to see the results by Manolete expected in June. Bear in mind the Bounce Back Loans scheme has a size of £51B of which over £1B is classified as fraudulent. Therefore, the opportunities for Manolete to grow are significant.
The company has also renegotiated its debt with HSBC. The key takeaway is that the leverage covenant has been deleted. Leveraged covenant is a requirement to maintain a ratio of net debt to Annualised EBITDA of less than 3.5 times. This gives Manolete a lot more freedom to manage its balance sheet. The total facility size is reduced to £17.5m, which is a positive because Manolete hadn´t employed nearly half of the previous £25M facility. This will reduce interest payments because Manolete had to pay interests on the unused amount of that facility.
In conclusion: the company expects to get a profit before interest and tax of £2.5M in FY2024. Assuming finance expenses of £800k (like in 2023) and taxes of £425k (25% corporate tax in the UK): I expect Manolete to obtain a net income of £1.275M. This net income doesn’t merit a price target increase, yet. However, once we start seeing the completion of the record number of cases signed in 2024, further updates from its Bounce Back Loans programme with Barclays and a further deterioration of the UK macroeconomic situation, I expect Manolete to deliver exceptional results. Once we get to see improvements on these aspects, I will likely increase the price target. Manolete is currently the largest holding in my portfolio. I will likely publish my portfolio with the weight (%) of each stock along the next weeks or month.
The day the trading update was published Manolete jumped 20% in the stock market. Volume was around three times the daily average volume. The day after I publish my first report volume was almost 10x the daily average volume but the stock price did not increase. In my opinion this tells us that now, there is less willingness to sell among the minority shareholders of Manolete. The main shareholders haven´t sold a share since IPO, except the CEO, which sold 1M shares for Mithaq Capital to enter the shareholder base. This was a nice addition, as Mithaq is the largest shareholder of Burford Capital a large litigation firm in the UK.
I reiterate my previous price target as shown below: (with the updated share price)
Manolete Partners reports. Own estimates.
And as always, any feedback is welcome in the comments or by sending me a message on Substack or through my twitter account @AAGresearch.
Thanks for the write-up. The chart looks pretty brutal though.
Either the stock was grossly overvalued and has fallen now into reasonable (attractive) valuation levels.
Or the market misprices the (growing) business ever more.
Or the market doesn't quite buy the company's claims about its business performance.
I can't tell yet.
In this regard: a 60%+ recovery rate vs a 1% (on average for everyone else) sounds suspect to me (i.e. too good to be true). How reliable is it? what exactly allows Manolete to be 1-2 orders of magnitude better than the rest?
I really always like your work. Congratulations.