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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gus 1065

30th May '19

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.

Maddox

An excellent result and a clear rebuttal of Cannacord analyst Portia Patel's critique of their revenue recognition method.

shipoffrogs

Is it?
They recognised the gains whilst there was a binary chance they would have to surrender them back to the buyer.
Selling this with a put option seems odd - was it an exercise in getting some badly needed cash into the business?

shipoffrogs,

The result was binary but that doesn't mean that the probability of the outcome was 50:50.

Hmmm, 'badly needed' is rather pejorative. BUR like many businesses is capital intensive so the more capital the better as this is a generator of profit and the faster that it can be recycled will improve it's capital efficiency. PP of Cannacord takes a similar 'glass half empty' stance but when you see the returns they are generating on capital you'd want as much as possible and to recycle it as quickly as possible. It's a positive driver rather than a negative one IMHO.
Regards, Maddox

JohnEustace

Calling it a binary risk makes it seem riskier than the actual probability. Annulments are very rarely granted.
I read it as the purchaser wanting to have insurance to protect them from that low probability event. And now Burford can book the $7m premium as profit.
Burford have had no issues raising funds on the market so depicting them as badly needing cash is without foundation.

By binary - I meant: Win/Lose, rather than 50/50.

To be pedantic you said "binary chance" inferring a 50% probability not "binary outcome".

Your point is fair - sloppy wording on my part.

31st May '19

Hi shipoffrogs, appreciated. Clearly there is a possibility that declared revenue might need to be reversed where a case is lost on appeal and this needs to be factored into an investment decision.

I see BUR's revenue recognition process as analogous to pharma companies taking prospective drugs through the approval process. Value is attributed as they pass through the Phase I, II and III trials - on a probabilistic basis but they might then fail to gain regulatory approval. As drugs can take years to progress through this process and the scale of investment c.£150m - £350m - the consequences can be cataclysmic for the firm.

BUR takes it's cases through a similar re-valuation process which isn't as transparent but they state it is based on movement in the underlying cases - as they frequently explain. By comparison with Pharma Cos BUR's case investments tend to be of much less in value, of shorter duration and far larger in number. BUR's risk profile whilst not negligible is arguably much lower as a consequence.

Regards Maddox

pka

3rd Jun '19

Today, Burford Capital's share price dropped 5% and the Daily Telegraph reported that 'Trading of veteran fund manager Neil Woodford’s flagship Equity Income fund has been suspended "with immediate effect and until further notice" due to high levels of withdrawals from investors'.

There is some speculation on ADVFN that those two things are related, because Woodford's fund is a significant owner of Burford shares. Large withdrawals from investors in Woodford's fund might cause the fund to sell large numbers of its most liquid stocks to raise money to pay its investors, and Burford is one of its most liquid stocks.

If that is the main cause of the drop in Burford's share price, it has nothing to do with the prospects for Burford's business, so now might be a good time to buy its stock if one takes a long-term perspective. On the other hand, any further sales by Woodford's fund to finance withdrawals by its investors might cause Burford's share price to drop some more in the short-term.

I had put two and two together to reach the same conclusion, right or wrong.
SharePad shows Woodford Investment Management holding 9% of Burford so there could be more turbulence. (The Burford website says 9.48% which I assume is a little out of date). Invesco are top at 13.9% - not sure if they will want to take more off his hands or not.
As you say a buying opportunity may present itself but I think I'll practice staying patient a little longer.
It will be interesting to see how the Woodford situation is resolved. Long term IMO it will be good to have him off the register or at least at a low level holding.

4th Jun '19

Burford Capital's share price is down a further 4% this morning at the time of writing in the absence of any news from Burford and not much change in the FTSE index. This seems to me to confirm that the sharp falls over the last few days are linked to the suspension in trading of Woodford's fund.

Rusty2

Now down 5.8%, tempting to top up but I have a fair amount already. I will be happy to see Woodford sell all his holding.

Carcosa

I would caution that it may take several days/weeks before Woodford liquidates some of his shareholdings in Burford. Today's drop will be largely due to the negative news not actual selling by Woodford.

donald pond

5th Jun '19

Woodford may not have to sell BUR: it is one of the few assets he owns where a big holder might suggest an in specie redemption. If I was Kent council that's what I would be doing.

Laughton

Can they do that though? Might that not be favouring one holder at the possible expense of others?

6th Jun '19

I think the only problem is in respect of unlisted securities. His big holdings, like BUR and BDEV, have an easily ascertainable price, so I don't think there is any controversy about using a listed holding for an in specie redemption, provided that the redemption includes a proportionate element of the illiquid assets. But with SJP pulling the plug on Woodford as well, I expect the selling pressure will continue here. When it stops and the shorts start to close, we should see a fantastic bounce, but it may be rocky beforehand.

I've just sold the relatively small number of Burford shares in my portfolio, because I didn't want to take the risk of them falling further due to forced selling by Woodford's funds. This probably means that Burford shares will now recover!

The first short on Burford has been declared today too.

Luthrin

24th Jun '19

Looking at today's Order List for the US Supreme Court, it would appear that Argentina's petitions for writs of certiorari in the Petersen case have been denied. As a consequence, the case will now presumably return to the US District Court for the Southern District of New York.

Another encouraging result for Burford in this case, although not a major surprise considering the recent published opinion of the US Solicitor General.

https://www.supremecourt.gov/o...

Burford Capital –An Exception to the Stock Rank Rules?

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Iwright7

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