Burford Capital –An Exception to the Stock Rank Rules?

27th Jul '17 by iwright7

407 comments 63194 reads

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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JohnEustace

2nd Oct '18

I think it's worth noting that this capital raise is a precursor to further bond issuance as per Chris Bogart's comment in the RNS:
"We are delighted with the strong response from current and new shareholders to this modest expansion of our equity capital, which will serve as an even stronger foundation for the debt and private funds issues that we expect to follow shortly. We have not issued any equity into the public market since 2010 and we continually review our capital structure in light of our desire to support the growth of the business to capture the opportunities before us. It remains important to us that we both optimise our capital structure and retain a conservative balance sheet. We remain excited about the opportunities we see to deploy capital in legal finance to continue to develop our business."

William K

5th Oct '18

I note these are now trading at 1748-1750 and still falling. It must be quite annoying for the institutional buyers who've bought at 1850.

Petrox

I have read the comments with interest I wonder if the bubble is going to pop. They are still dropping today so I have sold my holding I can always go back in when they find a level

ls2g08

Hardman and Co have put out a free to read research piece.

http://hardmanandco.com/docs/default-source/company-docs/burford-capital-documents/05.10.18-equity-issue-ensures-growth-is-not-adjourned.pdf

Thanks for that Hardman research piece. It's reassuring in the long term. At the moment I'd guess many of us are wondering how long the freefall in share price will last. It will probably take at least a week for the dust to settle - but it's always dangerous to guess the market.

donald pond

worth highlighting that the half yearly results had income and profit for H1 at $205m and $166m respectively. Hardman's note today (http://www.hardmanandco.com/docs/default-source/company-docs/burford-capital-documents/05.10.18-equity-issue-ensures-growth-is-not-adjourned.pdf) still has FY targets at $326m and $263m.
So if BUR, which has a history of strong growth, simply repeats its H1 performance in H2, it will be over 20% ahead of expectations. So I think today represents a fantastic entry point.

I know that these forecasts sometimes refer to the Tienver and Petersen cases and say that they may have lifted 2017 profits, but I am also mindful that in the FY report Chris Bogart said that it would be an absolute mistake to think that these sort of returns are exceptional: the nature of their business is that exceptional returns come along fairly often. So I am not convinced by the argument that profits will drop.

Nick Ray

At the moment I'd guess many of us are wondering how long the freefall in share price will last.

The AIM100 is in "freefall" at the moment (as is FTSE100 and a lot of other markets). So it is hard to isolate the effect of the placing on Burford Capital (LON:BUR) 's price performance.

Ramridge

One of the attractions put forward by many for investing in Burford Capital (LON:BUR) was (or is) its relative immunity from stock market gyrations.
So, with stock markets heading south, the recent slide in sp puts paid to this argument, or the argument is still valid and the sp slide is due mainly to stock specific issues.

Either way, this is no time to be brave. I am sitting on my hands with 80% cash. Brexit and Trump are the dominant dark clouds. Everything else is noise. Just IMHO.

doug2500

Are markets really in freefall? I would hardly call this a blip.

Burford Capital (LON:BUR) is my biggest faller by some way so my take is it's a bit more stock specific.

To be honest I wouldn't say the markets are in "freefall" but neither is Burford Capital (LON:BUR) . Burford Capital (LON:BUR) is down 15% from its high but it is up +15% over the last three months.

I think the point with Burford Capital (LON:BUR) is that their business is not correlated with the wider market but their share price is subject to investor sentiment and market psychology like any other quoted instrument.

I'm not touching my core holding but I do trade it a bit around the edges and I've gone long on a modest spreadbet. Fingers crossed.

harvs19

Ramridge - I understand your point generally about this not being a time to be brave, however not sure I agree with that specifically with this stock. Yes, the SP may be slipping which may or may not be due to stock market gyrations but I think the point about Buford being immune is the fact that their financial performance bears no relevance to the general economic situation. In a bear market I would actually expect Burford to perform better if anything as there will likely be more law suits out there and therefore more opportunities for the business. For me I hope to hold this stock indefinitely (or at least until I need the cash) unless facts change, which as far as we know is not the case. Burford have performed exceptionally well to date so I have no reason to doubt them now just because the sp has dropped a bit. I must admit I am surprised to see this below the placing price, especially bearing in mind that it was oversubscribed however it seems that Invesco are reducing their stake which may explain somewhat. I am viewing this as a buying opportunity and have already topped up at the placing price and will look to add some more once the sp settles.

shipoffrogs

"Hardman and Co have put out a free to read research piece".

Hmmm - if you're a shareholder ? I think you'll find that you paid for it.

JohnWigg

@ shipoffrogs - you're quite right. Hardman produced a report on a graphene company recently which was clearly a puff. (Didn't help the share price unfortunately!) In fairness, Hardman's evaluation of Burford Capital (LON:BUR) is pretty similar to that of Liberum and N+1Singer.

Stockopedia's voting system showed you as "-2". After my endorsement it shows "-1". I wish it could have shown "-2 +1" which would have brought out the mixed views.

Thanks JW - I'm not sure I would categorise H's report as evaluation, it just seems that Burford have paid them to reiterate the justification from their RNS.

I hold, but am never comfortable with companies that pay for "research" which seems independent but underneath the gloss is just their own PR. Demonstrates an over-emphasis on the share price ahead of the business fundamentals, and suggests more equity raises to come or director selling.

The timing here seems a bit crass too.

Noticeable that all those who subscribed at 1850p and didn't get any found it less attractive at a cheaper price - but that may say more about the herding tendency of the fund management industry.

6th Oct '18

"Noticeable that all those who subscribed at 1850p and didn't get any found it less attractive at a cheaper price - but that may say more about the herding tendency of the fund management industry."

Indeed. It just goes to show how much psychology there is factored into share prices. There may be some good sense too. Martin Zweig and William O'Neil suggest it's unwise to buy shares in a falling market. Their advice in general seems to be that the time to buy is when the market is bullish and the share price is rising. Also it's possible that Burford may have further to fall before bottoming out. I bought a few shares yesterday at 1750, but it was all very tentative and I'm holding back most of my cash as I've no idea which way they're heading in the short term.

janebolacha

I posted this on advfn just now:

I have always been puzzled by the continual potshotting of Burford's policy on assessing and recognising the increase in value of the investments it makes in individual legal cases and in portfolios of legal cases. This policy is nothing at all like that you refer to of software companies taking profit on signing contracts before having done the work, delivered the system and proved it works. It is nothing at all like that.

The best analogy I can think of is with engineering companies which obtain contracts which may take several years to design, develop, test, pass compliance regulations and standards, pass acceptance trials, then be signed off, all this time having to deal with various changes in parameters, changes in requirements, changes in circumstances. changes in personnel, etc, etc, until finalisation of the contract. Resources and expenditure are meanwhile devoted to the contracts, that is costs are built up in line with a budget, in the expectation that income will flow from those costs and generate the expected return and profit.

Along the way, that is during the course of the execution of the projects covered by the contracts, there will be accounting results dates and engineering companies will then (or, if they are sharper, will on an ongoing basis) review and assess costs incurred, contract performance, remedial actions needed, contingency allowanes needed to be provided for, likely outcome, changes of strategy needed, etc, etc.

It is as a result of these regular contract review procedures that enginering companies are able to decide on the amounts to be prudently recogised as profit as contracts are proceeding. So, for example, a company with a contract to build a new bridge or a new railway line might have completed, say, 35% of the work and might have estimated that its profit is now likely (taking account of all the factors I have referred to) to be £100m. It might then decide to recognise profit on that particular contract of, say, only 15% of that £100m, even though the contract may be 35% completed, thus applying a double standard of prudence.

As long as the approach is prudent and prudently applied at every stage of the way, there is no particular problem in such an approach. I expect that Burford's approach will be very similar in principle, that is assessing how far they are on with each case, performance against expected outome, unforeseen circumstances, contingent events, likely outcome, degree of certainty or of uncertainty, prudence of revenue and profit recognition.

Yes, issues may develop on individual cases but with such a prudent policy, consistently applied, across a very large number of cases, the likelihood of there being something going seriously amiss is, imo, quite low, especially as 90% of cases are actually settled through negotiation and never even go to court, being presumably settled with outcomes favourable to and acceptable to plaintiffs and to Burford themselves.

I'd even go further and say that this whole "issue" is a red herring, conceived in ignorance, unresearched and misunderstood by lazy analysts and repeated ad nauseum by unthinking investors.

Hi Jane,
I was going to reply to the effect that they prefer to base their valuation on objective events like the progress of the case, court rulings, etc. rather than make judgement calls but it's probably best to just quote Chris Bogart's explanation:

"Unrealized gains are more complex: they represent the fair value of Burford’s investment assets, as determined by Burford’s board of directors in accordance with the requirements of the relevant IFRS standards, as at the end of the relevant financial reporting period. There is no active secondary market for litigation risk, and thus there is generally no market-based approach to assessing fair value; to the extent that a secondary market transaction does take place with respect to an investment, the implied value of that transaction is a key valuation input. In the absence of such a transaction, we are mindful that the outcome of each matter Burford finances is likely to be inherently uncertain, may take several years to conclude and is often difficult to predict with accuracy. Moreover, litigation matters frequently experience multiple significant shifts in sentiment during their evolution. Burford thus eschews fair values based solely on current sentiment, and focuses on objective events (such as court rulings or settlement offers) to ground its assessment of fair value."

http://www.burfordcapital.com/investors/investor-information/financial-reporting-and-investment-valuation/

Jane
1. Prudence is no longer a principle acceptable in statutory reporting - it's all fair value now (hence GFC in 2008).
2.Like it or not, a big chunk of revenue and profits is based on (i) director judgements, (ii) secondary market judgements.
It's the big risk here and Burford is a young company with a short track record so there is a leap of faith by investors.

Valuation is always a tricky issue for illiquid assets. In a different sector you might want to look at HICL Infrastructure (LON:HICL) sale of its schools investments or the acquisition of John Laing Infrastructure Fund (LON:JLIF). Both are/were infrastructure funds making long dated, relatively illiquid investments with a limited secondary market. Both ended up selling assets/being bought out at materially higher levels than their expert/independent valuation.
There is no objective way to value these assets: they are worth what someone is willing to pay for them until the court determines their objective value (and even then, enforcement can be an issue). I would be confident, however, that valuations will be conservative, for the simple reason that the results invariably have surprised on the upside, and because the amount that Burford charge (typically 30% of returns in my experience) is so disproportionate to the financial risk, but that is because Burford are designed to take that financial risk, whereas most litigants aim to avoid tying up capital for years in litigation.

Burford Capital –An Exception to the Stock Rank Rules?

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Iwright7

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