Burford Capital –An Exception to the Stock Rank Rules?

Thursday, Jul 27 2017 by

I have great respect for the credibility of the Stockrank system and it is not a coincidence that >70% of my holdings have a SR>80. However, my single biggest holding Burford Capital (LON:BUR) is notably different with the lowest SR of all - Just 45. Worse it is classified as a “Momentum Trap” because of its strong M (100) and low Q (36) and V (14) scores. Yet it has been my best preforming company by a mile.

It’s not only the SR that take a cautious view of BUR because broker forecasts have repeatedly underestimated Burford Capital (LON:BUR) earning potential. Today’s H1 earnings announcement has again surprised to the upside and the house broker has upgraded its full year EPS by +74%, adding that they are unsure how to value the company.

This strengthens my view that it is important to look at a company as a whole and consider news, growth potential and its metrics. As ever please DYOR. Ian

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Burford Capital Limited is a Guernsey-based finance and investment management company focused on law. The Company's businesses include litigation finance and risk management, asset recovery and a range of legal finance and advisory activities. It provides investment capital, investment management, financing and risk solutions with a focus on the legal sector. Its segments include provision of investment capital in connection with the underlying asset value of claims; investment management activities; provision of litigation insurance; and exploration of new initiatives related to application of capital to the legal sector until such time as those initiatives mature into full fledged independent segments. Its provision of litigation insurance segment reflects the United Kingdom and Channel Islands litigation insurance activities. more »

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288 Posts on this Thread show/hide all

Ramridge 13th Mar 269 of 288

Excellent results. You have to go to the full report to find the eps figures.
eps 162.4 cents versus 106.2 , an increase of 53% . Consensus broker forecast was 1.8%

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iwright7 13th Mar 270 of 288

Yep - Another broker beating result from Burford Capital (LON:BUR) - Even the ROIC% which brokers predicted will drop, has improved! An exceptional growth company - I hold. Ian

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janebolacha 13th Mar 271 of 288

In reply to post #457208

Ian, remember I told you privately that I had over £1 pencilled in for this year's EPS?
Are you happy with the 162.4cts, that's about £1.25.

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iwright7 13th Mar 272 of 288

In reply to post #457233

Jane - Yes delighted with these results and your prediction was understated. Prediction for the coming year? Ian

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shipoffrogs 13th Mar 273 of 288

In reply to post #457253

Even tax contributed to profit!

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Ramridge 13th Mar 274 of 288

Congratulations, Jane. You were very early on board with this share. I trust you have multi-bagged deservedly.

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JohnEustace 13th Mar 275 of 288

Another excellent year (¬‿¬)

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iwright7 13th Mar 276 of 288

I just couldn't resist buying another Burford Capital (LON:BUR) tranch this morning paying £19.28 at the open.  Looking back I brought my first Burford in late 2015 at £1.86, when I thought it offered good growth and value on a PE of 12. If  Burford were to do another +25% EPS in the coming year then the forward PE would still be in the same order and thus the same thinking still applies.

As a aside, I just couldn't resist buying some more Somero Enterprises Inc (LON:SOM) today either - Fantastic return numbers and a confident outlook: "The Board believes the Company has numerous meaningful growth opportunities in 2019 across its broad portfolio of markets and products that is supported by positive non-residential construction market conditions and reinforced by customers reporting project backlogs that extend beyond 2019."

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ls2g08 13th Mar 277 of 288

I would be buying more burford capital, if it wasn't already my largest holding. Lets hope it makes a new all time high soon.

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iwright7 13th Mar 278 of 288

For those interested:

New 2018 Investor Presentation PDF Download - 42 pages

Sign up for 2pm Investor and Analyst Conference Call

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Luthrin 13th Mar 279 of 288

Interesting to see the positioning and tone of the Volatility section on page 6 of the Annual Report in conjunction with the previous section, where management discuss their ambition to develop Burford's business model.

I was first struck by the following paragraph on page 5:

To be sure, we continue to make hundreds of millions of dollars of litigation finance investments each year, where we provide financing to corporate clients and law firms based on the underlying value of their legal claim assets, but our clients have an ever-growing range of capital and risk management needs and we consider it important to meet those needs broadly. Investment banks have their franchises because they address client needs, and an investment bank that was only willing to do the most lucrative equity deals and refused to help its clients raise debt would struggle to lead the field and maintain relationships. Burford is essentially the legal industry’s investment bank, and the same rationale applies to us. Burford has also increasingly developed its investment capacity for complex strategies, an adjunct to our client-financing business that uses all of our same legal and financial skills without necessarily financing a client.

To me this is cautioning that some high margin opportunities will have to be sacrificed so that some capital can be deployed towards activities that provide the legal industry will a full range of finance services.

We then have the volatility section:

While we are pleased, once again, to be delivering these record-breaking results to shareholders, at the same time we have always spoken candidly and plainly in these reports, and we do so again now. We are enthusiastic about the long-term prospects for Burford. We believe that we have been a significant force in revolutionising the capital structure of the colossal global legal industry, with its more than half-a-trillion dollars in annual revenue. It would take effort today to find a lawyer in a major law firm unaware of the rise of legal finance: 96% of respondents to our 2018 litigation finance research study said they were familiar with the industry. Further, Burford is highly visible among lawyers aware of the category: 63% of lawyers interviewed say they associate us first or solely with litigation finance, with no other provider exceeding 3%.

All of this – the growth in visibility and awareness of litigation finance, and of Burford as the clear category leader – suggests a fundamental and irreversible change along with many opportunities for us to meet the growing and evolving financial needs of the legal industry and its clients. Just as Burford looks very different today than it did five years ago, we expect the Burford of the future to look very different than it does today. Innovation is one of our hallmarks.

However, the path from here to there remains uncertain and continues to carry real risk of earnings volatility. We have said this before, but when our caveat has been accompanied – as it has been – with steadily rising earnings, we fear that shareholders may have become complacent and expect nothing other than persistent and unbroken growth. If anything, the risk of volatility is greater now than it has ever been. We have written considerable amounts of new business in the past two years – well more than in the entire preceding seven years altogether – and it will take time for that new business to turn into income. At the same time, we are investing in growth and expanding our offerings. And, at bottom, we remain unable to control the duration and resolution of most of our investments.

I may be reading more into this than it appears, but to me it seems as though investors are possibly being primed for some earnings softness in either H1 or FY 2019, and this is something that I will now be mentally prepared for. I'm certainly in favour of Burford developing along these lines, and I remember Chris Bogart saying in November that they had a vision of the company becoming the Goldman Sachs of legal finance (without the 'vampire squid' allusion presumably). Inevitably though, I would expect such a long-term transition to result in some margin compression along the way.

If I were an analyst on this afternoon's earnings call, I'd be probing for some more insight on this.

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Ramridge 13th Mar 280 of 288

I am a bit puzzled by the fact that the company has chosen not mentioned the splendid EPS figure (they call it "income per ordinary share") neither in the RNS nor in the presentation. It only appears in the full report.

Is it not an important metric to them? Are they deliberately playing it down?

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shanklin100 13th Mar 281 of 288


Bizarre considering that its reported fairly early in last year's results statement

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blondeamon 13th Mar 282 of 288

I bought some Burford Capital (LON:BUR) this noon after the retreat, incredibly hard to estimate and forecast here with this kind of business until now but today's update gave some clarity that this is very under priced at the moment and that business is booming.

I can see the Brexit uncertainty adding a wealth of cases for them. I love this part:

"The big question this year was whether 2017's explosive growth was a one-time anomaly. These results show that it was not. Burford has committed $2.6 billion to new investments in just the last two years, more than twice its lifetime cumulative commitment level prior to that time. That is extraordinary and suggests a sea change has occurred in the legal finance marketplace."

That's very bullish in my book coming from the CEO.

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iwright7 13th Mar 283 of 288

One other part of the new Burford Capital (LON:BUR) report that suggests confidence...

....9% of Burford’s equity is owned by its employees, and in a remarkable show of confidence, 41 employees invested in our latest fund, committing $6 million of their own personal capital to the new investments they are underwriting and bringing total employee investment in our funds to more than $10 million when considering prior funds.

Given that Burford only have 110 staff , 41 is a big % taking an additional stake in the business.

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crystal tipps 13th Mar 284 of 288

Just digested the results and listened to the conference call.

Very pleasing results, full year up on last year across all the metrics I’m interested in, especially profit margin so the moat is still there.

Glad to see that the report covered a lot of questions that get asked at conference calls. I would say it has all that is needed to satisfy potential investors over the next six months, irrespective of market gyrations and the like. If I feel a little bit nervous between now and August, I’ll just reread it to calm myself down.

Very bullish on the (non) potential of the competition; real fighting talk. They might have well have said that the competition pick up the cases they chose to reject!

Business as usual, in my view.


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mojomogoz 13th Mar 285 of 288

Wow! This is a massive thread which I haven't read. I'm going to now but will take me a while. In the meantime I've added something to it based on SCVR post I made. My apologies if someone (or many people) has made the same points before me:

Quick take on Burford Capital (LON:BUR) -

Understanding the opportunity and why its so potent:

1) IMO the most informative way to think of Burford is as a specialist fundamentally driven event driven hedge fund. I say fundamental to exclude shorter term arbitrage and M&A type event vehicles and compare more to distressed and 'special situations' type investments that often have a heavy legal element to the position taking (and why their is an opportunity for specialist investment vehicles as opposed to ordinary asset managers that run away)

2) But its even better than (1) above as this is the first 'hedge fund' to find the right way to operate in this space by starting with a legal origination, screening and winnowing process. As it is the legal that unlocks the financial event this so much more optimal than the usual approach of starting with financial and newsflow screening and then back ending some legal analysis in to verify the catalyst for financial upside.

3) Effectiveness at exploiting the available opportunity has been demonstrated by past results. There is no reasonable reason to think that these results are not systemic the opportunity set and how Burford exploits it. The only two valid reasons to think that returns could wilt significantly are i) regulatory intervention or ii) economic catastrophe in US and west. Risk (i) is barely plausible as it would be a volte face to our system of government and law...so think political revolution sweeping away current norms....although this could happen in an evolutionary way for a variety of reasons. Risk (ii) is possible but you've got bigger problems to manage than your capital loss on Burford (probably 100% as they wont be able to pay back debt nor roll over). If this risk is your fear probably best stick away from stock market and horde gold etc.

Note, I don't think comparisons to an investment bank are right. They would need to create their own funding capability for that so hedge fund is better. Hedge fund run by old IB traders blow up all the time as they seem unable to realise that they no longer have infinite access to capital to chase down their investment ideas. This is why LTCM went pop and virtually every major hedge fund explosion.

2018 results:

4) The results were ahead of expectations (a tricky concept for Burford as company provides no forecasts and brokers don't know how to forecast it). Nevertheless, its looks like a big beat and multiple comes down to low double digits. This seems remarkably cheap for what is effectively a pool of capital that has proven highly able to make high returns that has a quantum of capital at risk currently that will probably generate very high future returns (that are very hard to imagine disappear any time soon barring political revolution or economic disaster).

But the reaction to results disappointing. Why?:

5) The results and call make it clear that Burford want more capital to go pursue opportunities. They cannot predict timing of cash flows from current cases. From a planning perspective they lack even enough cash at end of 2018 to take up their (very lucrative) share of the SWF partnership announced late last year...its lucrative as for their c.$330m capital commitment they get upside they would get from c.$600m of balance sheet capital!!!

6) So funding is a problem....but in a spectacularly good way.

7) 100% speculation but Invesco have a big inherited position from Woodford and I suspect they are sellers. Perhaps they sold a chunk today into good news and price performance earlier today (when up at £20 area). More generally there's a lot of people who have made a tidy sum from Burford but probably find it hard to appreciate and analyse. In many respects it looks risky as its not a simple widget company or even a bank/lender (its an event driven hedge fund listed on AIM!).

8) The recent high funding needs and significant raises for funds leave some thinking that Burford has growth trouble and an under appreciation of how a significant proportion the cash generation is back ended and comes as a 'surprise' 2-4 years after funds are committed

9) They have committed to a high proportion of single cases after last year trumpeting the relative safety and predictability of portfolio cases. They reported this positively as it indicates growth in new client relationships with legal firms (single cases are the entry level product) but based on last year comment that means their failure rate with cases is a little higher. Note this is balanced by growth in asset recovery business which has protected downside.

My conclusion: Significant upside from both earnings and probability of multiple re-rating. I think they should raise equity again and that shareholders should see that as a good thing as its increases return to them.

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shanklin100 14th Mar 286 of 288

I posted the following on yesterday's SCVR discussion thread at 16:24; as this seems to be the repository for all things Burford Capital (LON:BUR) related, I thought I should post it here...

Re Burford Capital (LON:BUR), earlier this afternoon, I sent an email to the CFO contrasting the presentation of EPS in last year's results (front and central) to today's results (not in the RNS and first detailed at p65 of the AR), requesting an explanation for the change in approach.

Rather impressively I received a reply within 40 minutes, The part of the email which relates to EPS reads as follows:

"Your point about EPS is a fair one. We did not include EPS this year because the EPS figures shown in our IFRS statements include non-Burford third party interest noise. Perhaps what we should do going forward is include an EPS line in our reconciliation table (page 51 of our annual report) and then we can have a bullet in the highlights section on EPS. As we have done in our history, we incorporate comments just like yours into our reports going forward to make them more fulsome for our investors so many thanks for your comments here.

An apples to apples comparison of EPS this year to last year (just on Burford only income) would have shown: 2018 at $1.56 EPS vs 2017 at $1.27 EPS, so an increase of 22%."

2018 profit after tax: $327.971 million
Average shares outstanding: 210,776,771 (this figure comes from Note 26)
2018 EPS = $1.56

2017 profit after tax: $264.845 million
Average shares outstanding: 208,237,979
2017 EPS = $1.27"

Hope this is of interest.

Regards, Martin

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blondeamon 14th Mar 287 of 288

Taking advantage of the forced seller here (starts with a W maybe?) might be an opportunity PIs might not get soon again. Bought some more today after yesterday's buy.

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crystal tipps 14th Mar 288 of 288

In reply to post #457738

May be a forced seller; may also be a bit of nervousness for the investment public given what is happening in Parliament at the moment...a number of good companies announcing good results have seen less than expected price moves. I think Burford Capital (LON:BUR) are no exception.

Re: reading the report, i noticed this
"This continuing evolution in Burford’s business requires investors to think of us more broadly as a specialty finance company – an investment bank for law – and not just a litigation funder. "

That being the case, I think the game has changed significantly here. Funding (single vs portfolio cases), Investment Management, Asset Recovery, Insurance, Bond vs Debt, vs Equity issuance. It appears that Burford Capital (LON:BUR) are steadily moving themselves further and further away from their peers in order to be the only show in town for all financial requirements with law firms and in-house counsel. 

Bulge bracket institutions are firmly in their sights.


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