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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324 Posts on this Thread show/hide all

mojomogoz 13th Mar 285 of 324

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 324

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 324

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 324

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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blondeamon 26th Mar 289 of 324

Still hold Burford Capital (LON:BUR) and bought some more just now. I'm down on my original purchase but hoping for a bounce at this historic level of support. Weird how the market reacts but take out the noise and you're left with a really good company at a less than fair value entry point.

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Tanglands 28th Mar 290 of 324

I am a long term holder. But I am now asking how does a shareholder get value from being a shareholder. Stupid question? Historically it’s been via profit performance and a high p.e driving price up, clearly not dividend yield. But the last results,although excellent seemed to have both a profit warning and also a suggestion that they will be ( now and forever?) cash hungry. The market and current holders clearly don’t like the valuation metrics and the share price,despite the excellent results continues to fall. So raising equity funds now would be a really poor choice. So why invest. So will the “new Burford” as the investment bank to the legal world, be able to continue to drive profits like they have in the past, I am beginning to wonder?

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mojomogoz 29th Mar 291 of 324

In reply to post #463568

Its a large innovative event driven investment vehicle (ie like a hedge fund). There's no evidence that the alpha it targets is diminishing nor that it has reached a scale whereby more capital cannibalises its return generating potential.

So, it is desirable and rational to take on more capital and generate exceptional return from that capital. As a shareholder I lose out if they do not invest from their balance sheet (although the deal with SWF was very nice and additive).

Who knows why the share price is dipping. Perhaps it is waiting for the capital raise. In which case it would be nicer if it were higher but just get on and do it. As they will generate a high return from that capital it is still better they get on and do it.

I believe its possible to think to hard about Burford Capital (LON:BUR) and miss the wood for the trees. (That perspective comes with a warning as I sometimes think too hard about stocks and cause myself problems)

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iwright7 29th Mar 292 of 324

In reply to post #463653

Who knows why the share price is dipping.

One factor is that Burford's biggest shareholder Invesco has been selling to keep its position at a manageable size.  Brokers seem to favour a target price of £23.00, which if achieved would be another nice upside.

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Luthrin 29th Mar 293 of 324

Arden Partners has issued a detailed research note on listed companies involved in litigation funding, focusing primarily on Burford Capital (LON:BUR) , Litigation Capital Management (LON:LIT) , Manolete Partners (LON:MANO) , Anexo (LON:ANX) and Rosenblatt (LON:RBGP) . It's available on Research Tree, for subscribers only I presume.

It seems unfair to summarise the several pages devoted to Burford in very few words, but this is their essential take on valuation:

"The Group continues to be the largest player in this rapid growth global market. With an increasingly diversified revenue base and the $1.6bn of additional funding announced in December 2018, we believe Burford is poised to enter the next phase of its development. The shares have pulled back recently despite the consensus beating FY18 results, meaning they now trade at a 2.8x FY19 P/NAV. We believe this undervalues the consistently high ROE and initiate with a Buy rating and 2,300p target price."

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blondeamon 1st Apr 294 of 324

It was already proven by a research note that it is Woodford selling like crazy to save fac eon his other failed investments that brought Burford Capital (LON:BUR) price down.

It seems like he's almost done now and there's great appetite for the shares. Opportunities in the market are not always rational and I believe this is one of them, buying Burford Capital (LON:BUR) below £20 is a window that will close soon enough when he's done selling.

Divi also on the way.

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ls2g08 1st May 295 of 324

Hi Team, anyone have any thoughts on canaccord's claims re Burford?

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Damian Cannon 1st May 296 of 324

In reply to post #473136

Rather than re-iterate what other people have said I'd suggest that you visit the Burford Capital (LON:BUR) board on advfn. This one isn't populated by swivel-eyed loons and one of the posters has obtained some direct feedback from the company. I found the comments useful and topped up moderately this morning (which means that I have a vested interest in them doing well!).

Blog: Ambling Randomly
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ls2g08 1st May 297 of 324

In reply to post #473146

Thanks Damian, I will have a look - I have to admit I avoid that place usually at all costs!

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patrick00 1st May 298 of 324

In reply to post #473136

What did they say? I haven't seen it

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pka 1st May 299 of 324

In reply to post #473201

According to today's Times:

'An Aim-listed litigation funder behind some of the world’s most high-profile legal battles fell victim to a bearish broker yesterday.
Burford Capital, which has a market capitalisation of £3.6 billion, invests in commercial legal disputes and takes a slice of the settlement if the case goes in its favour. Its recent work includes funding a case by Petersen, an Argentine conglomerate, over the nationalisation of YPF, the country’s biggest oil producer and efforts to force Farkhad Akhmedov, 63, a Russian oligarch, to pay his wife £453 million in a divorce settlement.
Such high-stakes cases, and the rich rewards that they can offer, have driven both the growth of the litigation funding market and a dramatic leap in Burford Capital’s share price, which over the past five years has risen from 132p to as much as £20.40.
Yesterday, however, analysts at Cannacord Genuity claimed that prices like that, or even yesterday morning’s £17.53, do not reflect the real returns and risks of the business. They alleged that Burford Capital’s stated return on invested capital was “confusing” and “significantly above the actual results” because it factored in “ongoing” invested capital that is yet to generate a return.
They believed, too, that the return on invested capital on concluded and partially realised litigation investments was 36 per cent, not the 85 per cent suggested by the company, and they highlighted 20 areas of risk or concern that were “under-appreciated”, including whether Burford would will be able to continue to self-fund its growing case commitments.
“Should realisations fail to materialise at the level we forecast, then we would expect to see new fundraising (debt or equity) and/or new lending to be curtailed,” Cannacord Genuity’s team said. Burford declined to comment. Its shares tumbled 118p, or 6.7 per cent, to close on £16.35 last night.'

However, a poster called Arregius on ADVFN asked Burford to comment on Cannacord's claims and posted the following response from Burford today:

'We don't generally fuss over individual analyst work; one can take a range of views about this business given its relative youth and ultimately it is on us to deliver long-term performance. However, we do fundamentally disagree with Canaccord's approach to computing returns and their commentary on our disclosures. All of our investment data is fully available publicly so investors are capable of analyzing our business in whatever way they would like and Burford has presented its returns in the same way for years and has always been transparent about their computation. To use a real example of where our approach to computing returns diverges from Canaccord's, we made a multi-case portfolio investment in 2017 in which the Burford balance sheet invested $127 million. It is early days still for that investment; thus far we have recovered $20.5 million from that portfolio and we have allocated $17 million of cost against those recoveries in a classic example of a partial investment conclusion. Therefore, we are reporting $3.5 million in gain from the $17 million investment, with a 21% ROIC on it to date. That return will form a part of our total return disclosure, on a weighted average basis. All of this is publicly disclosed on a line item basis in our investment portfolio reporting. Canaccord, on the other hand, would include all $127 million in the denominator of our ROIC computation the moment we have any recovery at all in the portfolio (although they would exclude the entire investment before we have any recovery), which would treat the portfolio at present as generating $106.5 million of losses for return computation purposes. We think that approach to investment reporting is nonsensical. Incidentally, if all one does to Canaccord's math is to remove the $127 million in the actual example above from the ROIC denominator and replace it with our $17 million cost, our ROIC would rise from Canaccord's claimed 36% to 58% - and of course there are other such examples too which take us to our published returns. The following data points are either on the concluded table on the website and/or on the investment portfolio table on page 22 of the annual report - I have laid them out here so that you can easily see the math. In the concluded portfolio we have invested $555m ($387m in concluded matters and $168m of costs incurred in partially concluded matters). We have generated gross recoveries of $1,027.3m on these investments for an 85% ROIC. In the ongoing portfolio we currently have invested $644.6m ($202.7m in the ongoing piece of partially concluded matters and $441.9m in ongoing matters). Please let me know if you have further questions.Best,Elizabeth'

A poster called Mad Foetus on ADVFN later wrote today:

'You cannot dismiss what any analyst says but I have read the note and her methodology is clearly mistaken. The fact that Burford explained this to her, and the eloquence with which Elizabeth O'C explained it to Arregui, suggests that the motivation behind the report was not entirely honest. The crux remains whether, if you buy, for investment purposes, a house with a field for £1m, and sell the field for £500,000, you should account for that as a loss of £500,000 and a house that has cost nothing, or whether you make an attempt to apportion the £1m purchase price between the house and the field. The absurdity of the former approach is clear. As others have said, try that with HMRC.'

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abtan 1st May 300 of 324

Burford Capital (LON:BUR) recently added a detailed summary of their portfolio performance on their website and I thought I would share a few of my findings for any interested parties.

Note these details are for all cases since inception of the company and are % figures only.

Cases concluded or partially concluded = 111
Cases concluded and won = 62%
Cases concluded and lost = 27%
Cases partially concluded = 11%

Breaking this down further:

23% of cases had an ROIC>+100%
19% of cases had an ROIC +50% to +100%
13% of cases had an ROIC +20% to 50%
7% of cases had an ROIC 0% to 20%

27% of cases had an ROIC <0%

11% of cases are only partially concluded

And one more breakdown

Average ROIC for cases won = 153%

Average ROIC for cases not won = -80%


So what does this show?

The number of lost cases is actually higher than I thought it would be (27%).

These are somewhat offset by 39% of cases generating between 0% and 100% return.

However, where Burford Capital (LON:BUR) really earn their value  - IMHO - is those 23% of cases that generate ROIC >100%

Of course the above %'s mean nothing without including absolute figures, especially given the increasing size of cases over the years, but hopefully some of you will find the above interesting.


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iwright7 2nd May 301 of 324

The Cannacord case seems to rest on their calculation of Burford Capital (LON:BUR) ROIC% being a lot lower than the company's and that this will depress Burford's ability to raise new funds.

I have never used a companies own return ratios and always looked for independant (and consistently calculated) numbers on which to make a buy/hold/sell decision. Looking at Stocko (Thompson Reuters) the current ROIC% number calculates at 18.8% and the ROCE has hovered between 13-19% over the last 3 years. This level of calculated returns have not impaired Burford Capital (LON:BUR) ability to raise new funds and with their strong track record, I do not understand why Burford will have a problem going forward.

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gus 1065 2nd May 302 of 324

Interesting discussion around Burford Capital (LON:BUR) . We’ve seen analysts making a name for themselves by offering a controversial bearish point of view on a stock before. I recall Glencore (LON:GLEN) getting a bashing a few years back when a previously credible analyst put out an extensive research piece demonstrating the equity was “worthless” which knocked about 40% off an already deflated share price (down to about 70p per share as I recall). Like journalists, there’s little copy value for analysts singing from the same hymn sheet as everyone else so it’s no surprise that once they have a bear hypothesis they’ll tend to go with it rather than try and rationalise it directly with the company. Good to have a contrarian view aired but doesn’t seem to have been proven at the moment.

One possible reference point might be the extent of any “smart money” market short interest. According to my main source, there are no disclosable (more than 0.5%) short interests in Burford Capital (LON:BUR) at the moment suggesting the professional bears are absent (notwithstanding yesterday’s share price fall) . If anyone has a different source saying anything different to that please could they post.



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mojomogoz 2nd May 303 of 324

Cannacord ain’t my G for Burford blood.

There’s nothing smooth and easy in trying to analyse Burford’s past return and appraise the future.

Fully weighting the full cost of capital into a partial return on an investment is insane. It’s like doing a discounted cash flow in an investment assuming there’s no future return. This is in fact the original approach of Benjamin Graham in the 30s when he could pick up shares for less than cash and net realisable assets values (suitably haircut) and so didn’t need to to worry about the future returns generated.

The approach Cannacord has taken if applied to say Somero Enterprises Inc (LON:SOM) would see them assume Somero to face rapidly deteriorating forward sales. It’s not a very good comparison as Somero trade in tangibles whereas Burford Capital (LON:BUR) is intangible. So perhaps something like WPP (LON:WPP) is a better comparator as it trades in intangibles with continued investment and realisation from that. But the real comparison is an investment fund in unlisted assets.

Anyway, that Cannacord can have such a regressive and asynchronous approach compared to modern valuation techniques and still come up with 1100p price target on a business that is all intangibles is a IMO a fairly strong buy signal if you believe they will continue trading decent to well.

The one critique that stands up and should be risk weighted by investors is if cash from realisations where to slow down and lead to a lack of capital for future investments (see more comment below). It’s notable that Burford appear to have put greater emphasis on lines of work that bring quicker resolution so as to have more capital to recycle - sensible.

It’s a problem not dissimilar from that of banks with long term liabilities and short term funding. However, Burford operate at much reduced and v conservative leverage levels compared to a bank as they do not have the magical balance sheet creation capability of banks (but they do have RoEs that commodity business banks can only fantasise about). This is why they have relied on more ‘off balance sheet’ financing in recent years with funds and sovereign wealth coinvestor. 

The SWF co invest arrangement is genius and provides positive leverage on return for Burford with no downside consequence to that leverage. The funds are okay - an extra bit of return that’s off balance sheet but really someone else is getting most of the upside and it would be much nicer if Burford had the capital on balance sheet...but it does mean they keep a capital source open that continues to fund and take pressure off of balance sheet capital as they seek to grow  so it’s a necessary evil right now. Once more mature field i assume they would close funds and fund investments direct from much bigger balance sheet with occasional capital returns too to investors.

Overall, I think the Cannacord banalysis is a really quite a good support for why you should invest in Burford. It’s super hard to give a fair value but i think it’s much higher with many years of growth and compounding high returns on capital to come. They even have the beauty of much more diversified investments without any reason why returns should decline. The valid risk of delayed return mentioned above is lessened by diversification and is also a bit Armageddon-ish in that it’s saying that primarily US legal entities plus entities that would struggle to operate as an illegal in eyes of US  will stop obeying legal adjudication as times are tough...possible but a bit fall and ruin of the West.

I love a bit of dissonance and misperception. Burford’s right up my street. But I know my style takes patience...it will bob when others weave but it means I don’t tend to get caught too heavily in the market flow and market traumas when they come.

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JohnEustace 2nd May 304 of 324

I also think the Cannacord Genuity approach is totally daft.
But I did reduce my Burford Capital (LON:BUR) stake after what I took to be a mild warning note struck by Chris Bogart in the earnings call - albeit I went from from extremely overweight to just overweight.
I cycled the money into Litigation Capital Management (LON:LIT) and Manolete Partners (LON:MANO), and judging by the recent price action I'm not the only one that has diversified that way. I'm now thinking that Manolete is getting overheated and it may be time to pick up some more Burford again.
The quoted legal sector has more options than Burford these days so I suspect there is a bit of rebalancing going on.

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