Burford Capital
I thought that the H1 2021 update today was worth listening to. The CEO mentioned that the YPF case had passed a significant milestone in that the "Fact Finding" stage was now closed, which he explained was usually one of the large "Tentpoles" in a litigation case.
He expects a trial date around Q2 2022. A favourable outcome for Burford Capital (LON:BUR) would net them more than 50% of their current market cap in gains. It's worth noting that they have already made back their original costs for this case, so this is a pure profit play, and (in my opinion) a free "call" option for stockholders.
Its worth listening to the Chief Investment Officer as he talks through their historic completion statistics on their asymmetric nature of their risk reward. Its very rare to find returns like these without taking significant risks, but Burford Capital (LON:BUR) 's unique business model and risk management approach allow for it.
Also touched upon was their new largest deployment for an anti trust case against a large global tech company.
Other highlights can be found here:
As the biggest player in an expanding TAM, it's worth digging into this company and management. The stockopedia ratings really do not do it justice because the business model has erratic (but consistent and excellent IRR) returns due to the nature of the legal system. This is my no.2 position in my top 10 holdings, and I expect to be holding for a very long time.
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12 comments
new CFO appointment looks a good hire and signals strategic intent about more US based investors
I watched this week's investor presentation and the first hour of it, in particular, was fantastic. There you had Chris Bogart explaining the business, and John Molot sharing the model they have built that predicts likely future returns. The RNS that accompanied the meeting covered it:
Now, they cannot predict when their cases resolve: history suggests the average case has a life of around 2.5 years, but some conclude in a matter of days and some take much longer. What they do know is that the longer a case takes to resolve, the better the return tends to be. Quick settlements are profitable, but cheaper.
Their model has been refined over the years and had predicted outcomes with an accuracy between 91-106% (from my recall). So it is pretty accurate and enables them to predict that their current book will generate $3.4bn of returns and $2bn of profits. The current enterprise value is around $3.2bn, which suggests that the current price is less than NAV (though obviously a prediction of what your cases are going to be worth isn't the same as a liquid asset of that value).
However, there are a few big elephants in the room. The first is the fund management business. Burford has launched a number of funds and they have had European waterfall payment provisions: in other words, Burford don't get any performance fees until the investors are paid in full. But they are now predicting the performance fees will kick in, generating $360m of additional fees. If we assume that is spread over 5 years, thats $72m a year, plus their "ordinary" fees. Lets make the assumption that the ordinary fees cover the expenses of the fund management business, leaving profits of $72m. Asset managers like Liontrust Asset Management (LON:LIO) and Premier Miton (LON:PMI) are trading on PEs around 30. Apply that the the fund management business and that is worth $2bn.
The second is YPF, their big case against the Argentine government which is due to go to court next May. How much will that be worth? Well, it looks a very, very strong case on the facts. And New York courts apply a rate of 9% interest rate to breach of contract claims, which will have been running since 2012. Now, Burford Capital (LON:BUR) bought 70% of the Petersen claim for $18.4m, and has already sold 38% of its entitlement for $236m. THINK ON THAT FOR A MOMENT.
Burford also acquired another claim against Argentina from a hedge fund in the US called Eton Park. Together, those claims have a value to Burford (i.e. after expenses, costs and the parts owing to third parties) of $1.47 and $5.14bn. It is worth noting the higher figure is the one you arrive at if you follow the methodology set out in the prospectus which accompanied the flotation of YPF, where the Argentine government spelled out in detail how much compensation they would give to shareholders if they renationalised the company.
So, just doing a sum of the parts, we get
current book $3.4bn
asset management co $2bn
YPF $3bn
Which comes to a total of $8.4bn, over 2 and a half times the current market cap. But that also overlooks that behind the assets is a company with a long term track record of generating extraordinary returns on capital and a leading position in a growing market with huge barriers to entry. That was something Bogart stressed: he said people asked whether he was concerned that big global banks would eat their lunch and he said no, because the last thing a global bank wants to do is fund litigation against its potential clients.
So however I cut it, I cannot see anything beyond Burford being massively undervalued and having a downside protected by the value of its underlying assets.
Donald, great post and I agree that there is high chance this will be looked at as a massive bargain in a few years if all pans out as expected. I think there is still a lot of misunderstanding and lack of trust in the management, largely due to the complex nature of the business, the fact it is so unique together with the industry being still relatively new and in its infancy. The muddy waters report / short selling obviously didn’t help things but lessons have been learnt and I really think that this has created a big buying opportunity to those who can see the bigger picture of what the company are doing here. I think we will start to see the fruits of their investments coming through over the next year and I expect realisations to pick up dramatically after subdued case activity largely as a result of Covid. One question, I may have missed on the presentation but is the current book value inclusive or not of the YPF Peterson matter? I can’t remember the exact figure but I know it has a large carry on the book so if the $3.4b is including Peterson then that would have to be taken into consideration as a potential risk to book value if the case goes against them. For what it’s worth, I think that’s unlikely but nevertheless it is still a risk that one case could affect the book value so dramatically.
Everything they have valued is exclusive of Petersen. I think they are keen to put that to one side and say “look, ignore Petersen and we are still much too cheap”. Agree with your post (unsurprisingly!)
Presumably the big catch with the YPF issue is that are they going to get the cash, and when, after a favourable judgement. It must have the potential for run on for years after that.
Potentially, but they said if Argentina/YPF lost they would normally have to lodge a payment bond before being allowed to appeal. Trying to avoid a judgment that has gone as far as the Supreme Court won't be easy
Link to today’s Investor Presentation materials. As ever a lot to digest.
https://www.burfordcapital.com...
Hope it’s not the usual buy the rumour sell the news market reaction.
Gus.
One thing the CEO and co-founder mentioned during the H1 2021 call was that he was impressed that about quarter of the total trading volume of Burford Capital was from the NYSE with minimal marketing or promotional effort from the firm at the time of it's debut on the exchange.
To increase the awareness of the business to US institutional investors and analysts they have planned the following investor event to take place at the NYSE in November.
Hi Shamusj
Thanks for starting this thread.
I've trudged through the FY21 interim report, presentation and webcast now and thought that I would add some thoughts here.
In no particular order:
1 - The Importance of a few Big Wins
For H1 FY21 Realizations:
That's quite an impressive return for the Akhmedov case and without it, the realized return would have been a paltry $4.5m.
Here are the splits (I hope you can make sense of them)
2 - Potential Future Returns
We don't have much to go on, so the following exercise is a little pointless, but working with what we've got...
Below are the latest ROIC and Deployments on the Burford Balance Sheet:
Note that:
Timing aside, this sounds great, until one realises how much is spent running the business...
3 - Running the Business
The major operational costs (other than tax) are:
So that's $150m per year just to keep things ticking along.
Much of that $700m could therefore be eaten away quite quickly (depending on the timing of realizations of course), which could slow down the company's growth too.
It's probably worth mentioning that I don't mind the added bonus that staff get (the "carry pool"), which led to the rather large non-cash accruals this period, though I do worry about the rise of the pay out from 4% to 9% over the last few years.
This doesn't seem very good at all.
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I feel that I should add a positive here for balance: $63m has already been collected at the period end + $100m from the Akhmedov case, which should cover the 2021 operational expenditure.
Any further cash generated over the next 5-6 months therefore should all flow through as pure cash profit that can be re-invested again.
4 - Why I hold?
Well, the hope is that eventually the increase in opex costs will slow down and the returns will increase at a faster pace.
$1b is already on the balance sheet as deployed capital (i.e. the cash is out of the door) and there is plenty of cash on the balance sheet to deploy right now ($430m at period end + $100m from the Akhmedov case that has now been received).
If the IRR of 25% holds true, then that's a lot of profit to come through.
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I'm also intrigued by the very large single deployment that has just been made, nearly $280m (of which $138m is by Burford directly).
3 years ago commitments were in the $20m range, so there has clearly been quite a step change in the size of the cases being funded. Imagine how large the deployments/returns could be after another 3-6 years?
To add to the above, I note management's comments on the call that they would not have deployed so much in one go (and so quickly) without high conviction of a positive outcome. Fingers crossed.
5 - Conclusion
I do remain wary about general operating costs, but beyond this:
Here's hoping.
Cheers
A
Thanks Abtan, I enjoyed reading your methodical breakdown.
In terms of your comment:
"So that's $150m per year just to keep things ticking along.
Much of that $700m could therefore be eaten away quite quickly (depending on the timing of realizations of course), which could slow down the company's growth too."
Timing of realizations was a concern of mine too, so I was pleased to see Burford produce statistics to help investors understand the lifecycle of a litigation case. It shows the average timings of the three outcomes to every litigation case (i.e. goes to court -> success, goes to court -> failure, doesn't go to court -> settlement).
In my opinion, this is key to understanding the merits of investing in Burford. See page 30 in their latest update. I have reproduced the infographic here provided by them below. It makes the 150m Op ex per year seem quite reasonable in this context, based on the size of deployments made to date (1.6 years for settlement wins & 2.8 years for court wins):
In summary:
It's also worth remembering a couple of things here again:
1) that the YPF/Petersen case is now past the discovery phase.
2) the senior management and two founders are heavily invested in the stock creating alignment with shareholders. The CEO used all of his 2020 bonus to buy Burford stock.
Wishing you all the best,
S.
For those who have an hour to spare, this is a useful discussion on the bull case where Andrew Walker asks all the right questions.
For anyone who wants to see a full rebuttal and forensic take-down of the Muddy Waters accusations you can see the attached which is all verifiable against the company reports.