Burford Capital –An Exception to the Stock Rank Rules?

Thursday, Jul 27 2017 by
49

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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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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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 »

LSE Price
1530p
Change
-2.5%
Mkt Cap (£m)
3,431
P/E (fwd)
12.1
Yield (fwd)
0.8



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348 Posts on this Thread show/hide all

Howard Adams 2nd May 309 of 348
5

In reply to post #473436

Hi

Adding to the Manolete Partners (LON:MANO) post earlier.

If this interests you note the 73% holdings by handful of shareholders including CEO (and his mother). Some investors like this tightly aligned stakeholders and its not uncommon in early stage IPO's. Others are less keen.

Worth noting though.

https://investors.manolete-partners.com/share-information/significant-shareholders

Regards
Howard

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wilkonz 3rd May 310 of 348

Keystone Law (LON:KEYS) will be reporting its preliminary numbers on 8th May. It's predicting profits comfortably ahead of expectations. I hold.

Investors will be looking for signs that Keystone’s proprietary platform model is still successfully drawing in lawyer recruits. (Reported in today's IC.)




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iwright7 3rd May 311 of 348
6

Worth noting latest repeat guidance from Arden suggesting some 40% Burford Capital (LON:BUR) upside.... Current market concerns surrounding an overstated ROIC and aggressive fair value accounting are unfounded, in our view. We reiterate our Buy and 2,300p price target.

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mojomogoz 3rd May 312 of 348
1

The drift down continues...Cannacord must be right ;)

I suspect that some are leaving purely due to price action. Some will be leaving on the news perhaps not previously understanding the way that the company reports earnings and how there is a gap with cash flows and some knock on pressure/limitation on what can be funded and how.

Where Cannacord may get their moment of glory is if there is a significant judgement coming against a Burford case. The visibility of that for a hard to predict earning profession generally would cause a down. Unless the judgement was against the Burford business model it would be great buying opp IMO. Anyone with a whiff of something?

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donald pond 3rd May 313 of 348
5

I think BUR have previously said that the downside from any single case wouldn't exceed 3%, so even if there was a loss, it isn't going to be material. And the nature of funding is that all they lose is the funding they have provided: as has been done to death, they don't book upside unless something has happened in the case to justify them doing so.
I think the real issue with BUR is that it has outgrown AIM. It needs a main market listing and, I suspect, a US listing. It also needs to improve its corporate governance a little. The business itself is fine but it was set up as a sub £100m Guernsey litigation fund with a typical offshore board. It needs to change structure to reflect the business that it has become. Molot and Bogart should be on the board for starters, as BUR isn't a fund but a fund/bank/fund manager hybrid leveraging its balance sheet. And although they are resistant, they need a US listing: after all, they are predominantly a US business.

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pka 3rd May 314 of 348
1

For what it's worth, the ShareProphets website has recently posted a bearish article about Burford Capital:

https://www.shareprophets.com/views/42374/burford-capital-a-screaming-short

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mojomogoz 3rd May 315 of 348

In reply to post #473786

Don't pay for SP...what's the argument? Different from Cannacord?

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pka 3rd May 316 of 348
3

In reply to post #473796

I don't pay for the ShareProphets website either, as I am not impressed by the quality of the articles on it. But I used to have a free subscription to it and that still seems to let me view some articles.

The article about Burford is by Nigel Somerville. His main argument seems to me to be in the following paragraphs:

"My biggest concern is how Burford arrives at its reported profits. When it takes on a case for litigation funding, it values the case higher and higher at each step of the process – but there is no actual cold, hard cash to show for it, only bills. Now obviously, if the case eventually goes on to achieve a win in court - and the recoveries are there - then it will result in a nice big payout. But until the judge rules and the cash is paid up, these apparent profits are for the fairies. After all - and put very simply - each case will have one winner and one loser, and the final determinant of who wins is not decided until the case is heard. So to book profits based on case progress, but without it actually getting to court, strikes me as being insane – and to base a £3.5 billion valuation on the stars lining up looks to be just pure folly."

"To understand the risks here, I gather that unrealised gains made up 60% of income in 2018, but made up 81% in H2. So if Burford loses a few cases, the P&L - not to mention the balance sheet - will take a major hit. And despite all the assurances in the world, until those cases actually go to court nothing is certain (apart from the wealth of the lawyers!). Yet Burford is reporting an increased proportion of its profits in this way. This method of accounting is referred to as mark-to-market – but valuing a case on its progress (and then finding someone else who might buy it) is very different from a more conservative valuation method which holds back value until there is a win in court. Burford’s competitor, IMF Bentham (ASX:IMF), does not mark-to-market and whilst Burford is valued on the market at three times its balance sheet, Bentham’s figure is just 1.5. Go figure."

"The $476 million of balance sheet recoveries to date have come from $113 million invested in only eight cases. That’s a very small sample size – and 45% of recoveries have come from just 9% of completed or partially competed cases. Now it could be that Burford has some kind of magic formula, but given that it has deployed $2.6 billion during 2017/18, yet only half of that between 2009 and 2016, it seems an extraordinary act of faith by investors to assume that these returns (however you measure them!) can continue at those rates. Surely, as is a common assumption, as the size of the operation grows the returns will tend to become far more ordinary as the net is cast more widely over perhaps weaker cases. And if Burford is in a unique market, well there are plenty of competitors springing up: there does not seem to be much of a barrier to entry, beyond having enough cash. Surely competition will bite – and even Burford has flagged that investors should not extrapolate past growth going forward."

"This idiot would therefore conclude that 85% returns (based on accounting rules which ignore the reality of the court case determining the actual outcome) will drop, in part due to Burford’s increasing size and in part due to increasing competition. For 2018, Burford reported post-tax profits of $318 million – call that around £240 million. Its market capitalisation is around £3.5 billion so that puts it on a PE of around 14.6. If we take loan capital into account, of $648 million, then it seems that EV/E would come in at around 16.7. It might seem reasonable – but only if those reported earnings actually come to pass. But against reported earnings of around £240 million, a look at the cashflow statement shows an outflow of $233 million (call that £180 million) from operating activities. So although Burford is reporting mega-earnings, it is burning cash. That, for me, is a major Red Flag."


I expect that this argument has been addressed previously by posters on Stockopedia who have a better understanding than me of Burford's business.

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bestace 3rd May 317 of 348
14

In reply to post #473806

It does seem odd that Burford Capital (LON:BUR) 'fair value' their investments and claim they are required to do so, whereas IMF Bentham do not, and neither do Litigation Capital Management (LON:LIT), who claim it as a positive that they do not fair value, e.g. this from their admission document:

5ccc83a38008aLCMfv.png

As far as I can work out, this situation arises because Burford Capital (LON:BUR) (as well as £MANO) account for their investments as financial instruments (subject to IFRS9, which mandates fair value accounting) whereas Litigation Capital Management (LON:LIT) account for them as contracts with customers (subject to IFRS15) and IMF Bentham as intangible assets (subject to  the Australian equivalent of IFRS38).

I struggle to understand the rationale for why litigation funding contracts would not fall under the financial instruments regime of IFRS9: to me they appear to meet the definition of a financial instrument given that they consist of financing arrangements with a financial asset in one entity (the funder) and a liability in another entity (the fundee).

Based on that understanding, it appears to me that it is Litigation Capital Management (LON:LIT) and IMF Bentham rather than Burford who are out of step with the accounting standards, even if that results in a more conservative outcome as far as their accounts are concerned.

I'd be interested to hear any other views on why it's OK for Litigation Capital Management (LON:LIT) and IMF Bentham to not apply IFRS9.

In any case, I think the whole fair value discussion is a bit of a red herring. The phrase "the map is not the territory" comes to mind. Accounting is simply a representation of the business (the map), it is not the underlying business itself (the territory).

When people focus on fair value accounting to suggest that Burford are being aggressive with their accounting, they are focusing on the map rather than the territory. They might as well be complaining to the Ordnance Survey because motorways aren't actually blue in reality. Clearly fair value accounting can be abused in the wrong hands, but in my view the use of fair value in and of itself doesn't constitute a red flag, it's simply an appropriate application of IFRS9 where other litigation funders have chosen different accounting policies.

Furthermore, there is nothing inherently superior about a conservative accounting policy. Investments in litigation which remain unsettled are clearly worth something when aggregated across a portfolio of claims. To attribute zero value to them may be conservative but it is clearly not accurate and therefore is not helpful for the investor trying to value a company. Focus on the territory rather than the map would be my suggestion.

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JohnEustace 3rd May 318 of 348
2

Burford Capital (LON:BUR) have sold part of their interest in the Petersen case to third parties, most recently at an implied valuation for the whole of $800m. It would be bizarre to then expect them to value the majority of the claim that they retain ownership of at zero in the absence of any setbacks in the case. 

Edit - they have said they hold it at less than the implied value for all the reasons they always cite about the uncertainty of legal outcomes.

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Luthrin 4th May 319 of 348
10

From the Canaccord note:

The actual ROIC on concluded investments is 51%, which cannot be disputed. Therefore, we believe BUR should focus on reporting this return figure rather than any other. We have updated our model to reflect a 51% ROIC on the litigation portfolio, versus our previous forecast of 60% (which was based on the cumulative ROIC as given by BUR in the CY16 results). This largely drives the 18% downgrade to EPS in both FY19 and FY20.

The 51% ROIC figure is derived from Burford's published portfolio data, showing total recoveries of $583.4m on a capital deployment of $387.0m for concluded investments.

However, one major Burford investment that is missing from the concluded list is the Teinver case. Even though BUR sold its entire entitlement in Teinver for $107m cash in March last year, this is still regarded by the company as a partially realised investment. This is because the matter is subject to annulment proceedings, and should the award be annulled, the sale could be rescinded at the option of the buyers. In this event, Burford would retain a $7m fee and would also have its original entitlement back, leaving it free to pursue the claim again. According to Burford: "Annulment (the cancellation of an award) is only available in very limited circumstances of serious error by the arbitration tribunal that we do not believe exist here, with only 6% of awards ever rendered by the World Bank’s arbitration institution having been annulled (and only 3% in the current decade)."

Burford's press release last March stated that based on historical proceedings, a decision on annulment would be expected in the second half of 2019, with the caveat that individual case timing is unpredictable. However, should we get the expected resolution in the next few months, the Teinver matter will shift from the partially realised investment category to the concluded one. This will give $107m of recovery for just $13m of deployed funds, and had that case already been in the completed category, the historical ROIC would be 73%, not 51%.

So, if Teinver finally settles without annulment later this year, we may well see a marked jump in historical ROIC for concluded cases when BUR publishes its updated litigation portfolio data in March 2020 (although this will also be dependent on the performance of other concluded investments). Under such circumstances, will we see a significant profit upgrade for BUR from Canaccord once they have punched this revised number into their 'model' (cough)? I very much doubt it, because I don't for a moment think that the person who penned the CG note was making an objective assessment of the company's prospects.

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mojomogoz 6th May 320 of 348

In reply to post #473746

Hi Donald, I think your points are all correct. However, they probably don't explain near term price performance...or do you think otherwise? ...Perhaps an implication of what you say is that for dedicated AIM investors (a not very set I assume) Burford is a source of liquidity...but that is likely to be outweighed by bigger funds and universe that would see a bit of AIM as an allocation for more risk seeking off benchmark?

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Maddox 7th May 321 of 348
6

I've managed to get hold of a copy of the Cannacord report by Portia Patel. It's always easy to fall victim to one's own confirmation bias so thought it would be worthwhile to challenge my investment rationale and work my way through her valuation analysis.

However, I've got to say its 'logic' undermines its own basis of valuation. As has been presented above in several posts PP has decided to exclude a value put on in-flight cases. This is on the basis that these valuations are based only on BUR management estimates and there isn't any mark-to-market bench-marking available as there is no secondary market and no transparency over how the estimates are derived.

OK fair enough. PP wants to base her valuation on what she terms a clean-NAV excluding un-realised cases and their dubious valuation. As she states:

"We believe that a “clean” NAV excluding the unrealised portion of litigation investments (i.e. cumulative fair value gains) is the best starting point on which to value BUR."

The problem is of course that looking forward to forecast a clean-NAV for FY20 she has to assume the realisation of currently open cases, I quote:

"Assuming a 2-3 year average life of investments, we assume that the “in progress”
investments which had some “unrealised” value attached to them in FY18 would be
resolved by FY20. Hence, FY20 NAV excluding fair value gains, which we calculate to
be $1,142.9m, is the basis for our valuation."

Surely, this is contradictory? In order to get to a 2020 NAV she is happy to assume that the 2018 unresolved cases get resolved. I thought she was excluding them and their value?

Excluding unrealised income might work as a valuation method looking backwards - where a high proportion of cases will be settled and their outcome known. But, forecasting forward a business like Burford where the vast bulk of its assets are in the form of in-flight unresolved cases - requires attributing some value to them like-it-or-not.

Regards Maddox

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Nick Ray 7th May 322 of 348
2
Excluding unrealised income might work as a valuation method looking backwards - where a high proportion of cases will be settled and their outcome known. But, forecasting forward a business like Burford where the vast bulk of its assets are in the form of in-flight unresolved cases - requires attributing some value to them like-it-or-not.

The clear implication is that it is very hard to value BUR's assets. You would expect that to be reflected in BUR's volatility - which Stocko currently puts at about 50% (very high).

Back in 2017 BUR's volatility was a more palatable 30-40% and I think the change in volatility probably does fairly represent the change in the "risk" in BUR as it has grown dramatically. (But "risk" in this sense can be positive or negative: BUR could have a disaster of a year or it could win all its cases.)

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Maddox 7th May 323 of 348
4

In reply to post #474156

Hi Nick,

As Niels Bohr, the Nobel laureate in Physics, is quoted as saying, “Prediction is very difficult, especially if it’s about the future!” ...and I wouldn't contradict him. What I can't accept is equating share price volatility with risk. I'd also question whether BUR's growth in capital increases rather than decreases the risk? BUR turns over its capital on a rolling basis and if that capital is deployed across a larger number of proportionately smaller cases then arguably the predictability of the out-turn and hence the risk will be reduced.

BUR has had some significantly large cases in the past that may have favourably distorted the quantum of their win-record. In building a more conservative BUR forecast it may thus be more prudent to model scenarios with some lower return figures.

The current share price seems to have been influenced to a remarkable degree by Cannacord's report. But I doubt whether it will to any degree influence the fate of the litigation cases that will ultimately determine BUR's performance.

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Nick Ray 7th May 324 of 348
5

In reply to post #474201

I don't like the term "risk" myself either. I prefer to use "uncertainty". You can guess a mean valuation for BUR's assets in the future, but there will be a wide range of possibilities either side.

If the increase in BUR's size were due to taking on a larger number of similarly sized cases to the ones it previously had then the volatility would reduce with the square root of the change in the number of cases.

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JohnEustace 24th May 325 of 348
6

Some movement on the Petersen case. The Argentines appealed on sovereign immunity grounds to the US Supreme Court. They asked the US Solicitor General for his opinion. He has now said that the Supreme Court should decline to hear the appeal as the original ruling in New York was correct. It's very likely that the case will be sent back to the court in New York for hearing to proceed.

Meanwhile the Argentinian Plan B involves bringing a case in Spain to try to invalidate the original deal that Burford did to acquire their interest in the case.

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patrick00 24th May 326 of 348
1

In reply to post #478481

Thanks for sharing. Where did you find the news?

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JohnEustace 24th May 327 of 348
2

I have a Google news alert set up - this article is behind a pay wall but the greyed  out heading is readable
https://www.law360.com/articles/1161977/justices-urged-to-pass-on-argentina-ypf-nationalization-row

There is some more discussion on the advfn thread with a translation of an Argentinian article about the Spanish case. Chrome does a reasonable translation.

https://www.clarin.com/economia/reves-argentina-gobierno-donald-trump-recomendo-juicio-ypf-siga-unidos_0_BkMDhXjhZ.html

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gus 1065 30th May 328 of 348
7

Update on the Teinver case appeal process resolution reported this morning. Worth (IMO) reproducing the full text for posterity as an example of how Burford Capital (LON:BUR) go about marking to market their investments through the process.

Gus

—————-

30 May 2019

BURFORD CAPITAL ANNOUNCES SUCCESSFUL CONCLUSION TO TEINVER ANNULMENT APPLICATION

Burford Capital Limited ("Burford Capital" or "Burford" or "the Company"), the leading global finance and investment management firm focused on law, announced today that the World Bank arbitration panel considering the Republic of Argentina's annulment application in the Teinver matter unanimously dismissed the application and upheld the original tribunal's decision in full.

As previously reported, Burford sold its entire interest in the Teinver matter for $107 million in 2018. The transaction included the ability of the purchasers to put the investment back to Burford should annulment be granted whereupon Burford would have had to return $100 million of the purchase price (and Burford would have regained the investment to relitigate the matter). With the decision on annulment, the put has now expired.

Burford previously recognised $87 million of income associated with the Teinver sale ($100 million of the sale price less Burford's $13 million investment) and treated the incremental $7 million as the premium for the put, which was then carried at fair value on Burford's balance sheet. With the put now expiring, the $7 million will be recognised as income in Burford's financial results for the six-month period ending 30 June 2019.

Now that this investment has concluded, Burford is able to provide a valuation history for the matter, which illustrates Burford's longstanding and conservative valuation process. At the end of 2016, at a point when the arbitral tribunal had decided the key question of jurisdiction in Teinver's favour but had not decided the merits of the case, the investment was carried at a fair value of $30 million, $17 million of which was recognised as an unrealised gain (19% of the ultimate total profit) and $13 million of which was cost. During 2017, the arbitral tribunal decided the entire matter in Teinver's favour and awarded it substantial damages, and Burford increased the investment's fair value by $39 million to $69 million, generating $39 million of unrealised gain and bringing the total amount of unrealised gain to $56 million (60% of the ultimate profit). In 2018, when Burford sold the investment, it recognised a further $31 million of income to bring the matter to $100 million of proceeds and an $87 million realised gain. Now, in 2019, Burford will recognise the final $7 million of income associated with the put's expiration.

In aggregate, the Teinver investment produced $107 million of proceeds on a $13 million investment for a total profit of $94 million, a 722% return on invested capital and a 39% IRR.

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