Burford Capital –An Exception to the Stock Rank Rules?

Thursday, Jul 27 2017 by
54

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 »

LSE Price
756.98p
Change
-5.7%
Mkt Cap (£m)
1,756
P/E (fwd)
5.7
Yield (fwd)
1.6



  Is LON:BUR fundamentally strong or weak? Find out More »


407 Posts on this Thread show/hide all

Luthrin 24th Jun 348 of 407
8

Burford announces sale of a further 10% of its Petersen entitlement for $100m, giving an implied valuation for the original entitlement of $1bn.

Burford still owns 61.25% of the original entitlement.

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BUR/14122228.html

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JohnEustace 27th Jun 349 of 407
2

Now that the Petersen case has been sent back to her at the Second District, Judge Preska has invited written submissions as to how the case should proceed by July 3rd. She will then have an audience with the parties on July 11th. It seems also that Eton Park will be joined to the case so that all claims can be heard at the same time.

Understandably Burford are impatient for a resolution, the Argentines not so much.

"The defendants' repeated attempts to invoke foreign sovereign immunity have kept this case on the doorstep for more than four years, and these attempts have now been definitively determined to be without merit," Burford said. "The time has come to proceed with an expedition,"

https://www.lanacion.com.ar/economia/ypf-la-jueza-preska-convoco-audiencia-definir-nid2261444
http://www.analisisdigital.com.ar/nacionales/2019/06/27/ypf-otra-senal-negativa-para-el-pais-en-el-juicio-que-se-inicia

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Laughton 27th Jun 350 of 407
3

Interims and earnings call set for July 25 - less than 4 weeks after the six month period end.
Only wish all "my" other companies could be as efficient.

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iwright7 25th Jul 351 of 407
7

Great H1 Burford Capital (LON:BUR) results with circa +35% increase in revenue, profit and new commitments. I had been hoping that the Sucker Stock classification was an anomaly, but you never know until the results are out.

Outlook very positive too...  

"Burford has had a momentous first half, with profits exceeding $200 million and assets surpassing $2 billion for the first time. Income from our core litigation investment portfolio was driven by a blend of attractive cash realisations across multiple vintages. Growth in demand for our capital and our capacity to respond with innovative new solutions are the hallmark of our outright industry leadership and reflected in record new investment commitments of $751 million. We are excited about the outlook for the legal finance market and our unique ability to capture the opportunities we observe.


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JohnEustace 25th Jul 352 of 407
4

In reply to post #496951

Not bad for a Sucker Stock on a Stock Ranking of 10!

I was confident enough to tempt fate by taking a screen shot of the Stock Rank yesterday as a souvenir.

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andrea34l 25th Jul 353 of 407

In reply to post #496951

One thing I find odd is that they omit to include either a balance sheet or cashflow statement in the interim results.

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monions 25th Jul 354 of 407

In reply to post #496996

Morning Andrea,

They include more information in the presentation document and full interim report which you can download from the Burford site.

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andrea34l 25th Jul 357 of 407

In reply to post #497011

Thanks, SB - I do think it should be in the RNS though, this is key information

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iwright7 25th Jul 358 of 407
3

Worth noting from the full report......

Our new (Norway) sovereign wealth fund arrangement is performing exactly as we had planned: it is providing incremental capital – akin to structural leverage – while enabling the balance sheet to increase its investment returns without having to advance every dollar of capital. Thus, we were able to have the balance sheet only modestly increase its commitment of new capital this period, but when considering the fact that we will receive 60% of the profits from the sovereign wealth fund arrangement for our contribution of one-third of the capital, we leveraged our investment capital and increased the efficiency of our capital utilisation.

Just looked back and my 1st Burford Capital (LON:BUR) purchase in Nov 2015 was at 186p, so I am a very happy holder. I believe that their returns and their forward impetus means that Burford Capital (LON:BUR) is worth circa £20/share currently - Libertum one of their house brokers, are suggesting a target price of £26, which is a further upside on this mornings price of circa 50%. 


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JohnEustace 25th Jul 359 of 407
1

In reply to post #497046

They do seem to be edging towards a second listing in New York, but not this year. I expect the question will come up in the call this afternoon.

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Sonia Danthy 25th Jul 360 of 407

testing!

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herbie47 25th Jul 361 of 407

In reply to post #497081

?

Why is £ ticker not working anymore?

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herbie47 25th Jul 362 of 407

Yes I looked at the SR on Burford Capital (LON:BUR) the other day, could not believe it was only SR of 10, their figures and growth is much better than some "superstocks". I thought about selling some but held on until these results.

Does anyone know the latest debt position?

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Sonia Danthy 25th Jul 363 of 407

In reply to post #497091

Hi Herbie, I was just testing something. Please ignore that.

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mojomogoz 25th Jul 364 of 407
8

The reason that Burford Capital (LON:BUR) share price ain't going anywhere today despite good headline numbers:

1) The level of deployment of balance sheet fell meaningfully compared to H1 2018

2) Extra funding is required to deploy balance sheet capital at a growing rate.

As a result of low deployment cash levels were high at half year (include litigation finance receivables and gets near $300m). They report the low deployment as a timing thing and looking at their growth in commitments this may be wholly the explanation...but obvs the market looks on with a bit of scepticism and feels it points to need to raise capital.

An announcement this afternoon re what they will do to finance growth could be a significant catalyst to more upside....depending on what it is:-

Debt: More debt could be challenging. Not that they have a lot but as it needs to be repaid / rolled over and so is a visible future pull on cash. I don't doubt they will have the cash flows to make this simple in future but the market, as implied by the valuation, ain't in the mood to give them a break on this so risk of non rational response to debt to grow.

Equity: Depending how they do it more equity could be positively received. A straight equity raise on AIM is likely to depress price short term. It shouldn't as investors should be falling over themselves to provide equity to this high return generation machine. But perhaps JohnEustace's insistence that a US dual listing or even primary is coming with some associated equity issuance could be the solution? IMO this would likely lift the valuation out of current lows.

There's not an ideal comparison to make against Burford but I've selected Diageo (LON:DGE), Jupiter Fund Management (LON:JUP), Hargreaves Lansdown (LON:HL.) and Manolete Partners (LON:MANO) -

https://www.stockopedia.com/compare/?tickers=LON%3ABUR%2C+LON%3ADGE%2C+LON%3AJUP%2C+LON%3AHL.%2C+LON%3AMANO%2C+

Burford's relative weakness compared to these other businesses is its high requirement for capital to grow. Manolette is similar but the duration of its cases is on average much less so the return of capital quicker. Compared to all these high margin cos Burford looks very attractive. Jupiter and HL are particularly capital light but both have high cyclicality as a result of underlying market exposure. Diageo is interesting as it grows very slowly top line but does better in eps terms due to high margins and attracts a premium valuation as a result. Burford is very cheap relative to it and has growth....

Even if deployments have gone ex growth at Burford there is still a carry through from prior deployments and commitments to the top line in coming years as prior investments and commitments mature. So the business is not yet at post growth cruising altitude if post growth. At post growth the return of capital should be stupendous. However...

Burford is not post growth and is still somewhere relatively early but just needs to either solve its funding snafu to grow very rapidly or fund itself with some cunning deals like SWF added in to grow at a good clip (haven't worked that out but should be >20%!).

Obviously, I don't believe its ex growth. The upside is still very large IMO

PS

Vis a vis Manolette, I'd worry about the duration of its growth relative to Burford and the ability for it to move out of a very small and country specific niche in UK. Add in relative valuation and Burford looks a more favourable long term hold. Its possible that Manolette could start to discount post growth quite soon...but given its small and heavily owned by small PIs its probable that more cash returns and earnings growth short term will spike the price up.

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JohnEustace 25th Jul 365 of 407

In reply to post #497186

There's a presentation from Manolete just up on YouTube where Steve Cooklin addresses the question of the potential size of their market. Definitely a niche compared with Burford and very reluctant to try to expand internationally.

His expression amused me when asked about their own broker Peel Hunt downgrading them to hold!

https://www.youtube.com/watch?v=WbggepZmqoo

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mojomogoz 25th Jul 366 of 407

In reply to post #497246

Manolete Partners (LON:MANO) is a very good business and my point was relative to the road and return ahead of £BUR

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Edward Croft 7th Aug 367 of 407
8

I've always found this thread interesting.  Obviously the StockRanks are just statistical measures... they aren't right all the time at all. 0-20 ranking shares have generally been losers (on average) but one in three is still a winner on any annual basis.  If you can pick a winner in this bucket, they tend to do better than average.

But there's been an ongoing belief that the StockRanks have always been 'wrong' for Burford Capital.  One of the nice things on the new site is the StockRank history.  

Here's the BUR share price chart, with the StockRank underlaid.  

03e1aa5f25badf879b135e6f6041e9916072aa311564160333.png


As you can see - the StockRank was 80+ between 2014 and mid 2016, reaching as high as 95 in January 2015.  So BUR was well flagged by the StockRanks.  The SR has dropped gradually through the last few years, and yes possibly flagged BUR as a Momentum Trap a bit early. 

Where this goes next is up to the market to decide.  I'm just flagging that BUR hasn't been that much of an exception to the StockRanks... and if the recent weak price action after good results tells anything - it may be that there are a lot of people sitting on fat profits thinking of cashing a few in.  That kind of process can take a while to unwind.

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