Small Cap Value Report (14 Mar 2017) - GYM, BLTG, BUR, FCCN

Tuesday, Mar 14 2017 by


Share price: 183.9p (+2%)
No. shares: 128m
Market cap: £236m

Full Year Results

(Edit: Please note that after initially publishing this note, I bought some shares in GYM. I now have a long position in this company).

Nice progress at The Gym, with the growth strategy being executed as planned.

To quickly summarise what it's doing: The Gym is pioneering the low-cost gym model with 24 hour opening times, a skeleton staff structure, no long-term customer contracts, and much cheaper prices than the conventional gym chains.

Today's statement mentions that one third of joiners are new to gym membership, which bodes well for discount chains growing the market and not just taking share from the competition (although they also mention that the largest number of new joiners come from traditional higher cost gyms).

The adjusted profit before tax for the year was £8.7 million and customer numbers grew by 19% to 448,000, as had already been revealed in the trading statement I covered here in January.

According to the CEO, "the way our new sites mature over time remains predictable", and this can be seen seen in the EBITDA per mature site, which is almost flat year-on-year despite the growth of the estate.

They also claim to have a "known and predictable cost base", in contrast to other leisure businesses and indeed the EBITDA margin on mature sites is fairly stable year-on-year (up to 47.5% from 46.3%).


The new financial year has started well and in line with the Board's expectations. January and February are the two most significant trading months of the year for any gym business. Membership numbers at the end of February had increased to 495,000, a record level, with a 10.5% increase since December 2016. This level of member growth will help to underpin our performance for the rest of the year.
In 2017 we anticipate opening towards the top end of the guidance range of 15 to 20 sites. As in 2016, these site openings will be weighted to the second half of the year, with six sites expected to be open in the first half of the year.

Financial Results


I'm sure some folks will be looking at this on a PE ratio basis, but for something which is rolling out across the country, it really needs to…

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All my own views. I am not regulated by the FSA. No advice.

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The Gym Group plc is a United Kingdom-based holding company. The Company provides health and fitness facilities. The Company operates approximately 90 gyms across the United Kingdom that are open around the clock. The Company offers gym memberships. Its subsidiaries include The Gym Group Midco1 Limited, The Gym Group Midco2 Limited, The Gym Group Operations Limited and The Gym Limited. more »

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Blancco Technology Group Plc, formerly Regenersis Plc, is a provider of mobile device diagnostics and secure data erasure solutions. The Company's segments include Erasure and Diagnostics. The Erasure segment focuses on development and delivery of solutions, and includes Blancco, which provides erasure software; SafeIT, which is engaged in cloud and networked data erasure business, and Tabernus, which is engaged in providing software erasure products. The Diagnostic segment includes Xcaliber Technologies, a smartphone diagnostics software business. Its secure data erasure solutions include Blancco Management Console, Blancco Cloud, Blancco File, Blancco 5, Blancco Mobile Solutions, Enterprise Erase E800, Enterprise Erase E2400, Enterprise Erase Mobile and Ontrack Eraser Degausser. Its mobile diagnostics solutions include fault diagnostics, repair and program enablement. It serves manufacturers, financial institutions, healthcare providers and government organizations across the world. more »

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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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164 Comments on this Article show/hide all

Steve Hill 27th Jul '17 145 of 164

In reply to post #202607

Hi Ram

I know your a Minervini man & he said that Livermore was one of his major influences, for a brief background to his life & his way of trading you can read "Hot to Trade in Stocks", its only a couple of quid for the Kindle.

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timarr 27th Jul '17 146 of 164

Very happy with my Burford Capital (LON:BUR) investment but you've always got to look for the negatives ...

... and you've got to reckon that if a company gets involved in funding litigation against sovereign governments then at some point those governments will look to introduce regulation. In addition cases as Peter Thiel's secret funding of the litigation against Gawker don't tend to help. Burford themselves have pointed out that this doesn't really have anything to do with their business, but history suggests that governments don't always apply business logic to regulation, particularly where it's costing them money.

The issue with this, of course, is if it does happen we won't see it coming. Just sayin' ....


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Ramridge 27th Jul '17 147 of 164

In reply to post #202611

Thanks, Steve. It's on my to-do list now.

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Steve Hill 27th Jul '17 148 of 164

In reply to post #202615

I can't see any first world democratic country making litigation finance illegal as it is a public good, it benefits society in that it allows people / companies recourse to the law that may otherwise be denied it on cost grounds - Burford do due diligence & therefore it is not in their interest to finance groundless cases.
I think this is a bit of a red herring worry - I believe the real concern would be a big player moving into the market once Burfords profits catch their eye.

On what grounds would you believe they would make litigation finance illegal ?
In what way is society hurt by it ?

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timarr 27th Jul '17 149 of 164

In reply to post #202627

I think ignoring the risk is in the realm of wishful thinking - just because we don't think it should happen or that it's reasonable doesn't mean that it won't. And, a side-issue though it might be, the Gawker case suggests that there are cases in which it can be used to shut down freedom of speech: is that a public good? As this article suggests, big businesses hate it already - they'll be plenty of lobbying going on behind the scenes:

Burford Capital (LON:BUR) is now my largest holding, but I'm not going to ignore the potential risks of the investment, regardless of the ongoing opportunity.


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Steve Hill 27th Jul '17 150 of 164

In reply to post #202639

Hi Tim

The article is completely without basis, Burford or any other litigation finance company act as a filter & would only ever finance a case that they believe had legal merit & a chance of succeeding. Do you agree with the journalists point of view or knowing the facts believe that the argument has any merit, if not it is just someones groundless opinion.
Knowing the facts can you personally make the case for making litigation finance illegal, we have to have some trust that our politicians / law makers have a reasonable amount of intelligence or we would not make any investment for fear that the industry could be made illegal in the future.

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timarr 27th Jul '17 151 of 164

In reply to post #202659

Hi Steve

At no point have I suggested that there's any possibility that litigation finance will be made illegal, so I don't know why you keep on repeating that point. Regulation would reduce Burford's profits but is hardly likely to send them out of business. I see next to no possibility of a total loss of capital here.

I also agree that the article isn't very good, the interesting point is that the author is actually not a journalist ... as students of discourse analysis would no doubt agree it's often not what people say that's important, but why they say it.

However I don't understand why I have to make any case at all - whether I believe litigation finance is acceptable or not is completely irrelevant. In my experience when I allow personal feelings to override logical analysis I make poor investment decisions. And my opinion on that matter will make no difference whatsoever to subsequent events - so why would I even bother considering it?

As it happens I think there's a very good chance Burford will carry on making very good returns, and a much smaller chance that some form of regulation will be introduced to limit those returns - but the point is, that if it happens it will be a cliff-edge event and is therefore inherently unpredictable. And when that's happened in the past, as with on-line gambling in the US or more recently with spread-betting in the UK and Germany, the result has been a sudden and precipitous drop in the share price.


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bestace 27th Jul '17 152 of 164

Given the rates of return on offer, it is possible that litigation funders are leaving themselves open to claims of usury and champerty, as the Ireland ruling a few months back demonstrated. 

However it is interesting that regulatory risk barely gets a mention in any of Burford's annual reports since the company incorporated, not even in the risks section. The only exception is the 2015 report so it's worth quoting that at some length to get an understanding of their take on the issue:

The bulk of Burford’s business is commercial finance – providing capital to businesses in multi-million dollar transactions. As a general proposition, commercial finance activities of the size conducted by Burford are not regulated in most jurisdictions. Company X is generally free to lend money to Company Y, or to lease equipment, or to factor receivables, without a governmental regulatory agency becoming involved or overseeing those activities. To be sure, some commercial financial providers are regulated for other reasons – banks are regulated for being banks, for example – but we do not see any significant movement to introduce regulation of commercial finance generally.

However, that is not the end of the story, because most of the assets that Burford is financing are related to litigation or arbitration and exist within and under the supervision of the judicial system. That system is not a regulatory one in the sense to which investors have become accustomed in the financial services world, and it tends not to operate through regulatory agencies, but instead pursuant to complex rules enforced by the justice system itself which vary widely by jurisdiction (and can even vary considerably within a single jurisdiction based on type of case). For example, different adjudicative systems require different types or levels of disclosure of interests in a litigation matter or in the litigants, or prior approval of various economic arrangements. Burford complies with the rules applicable to its activities in each jurisdiction and adjudicative system in which it operates.

As a result of this existing and pervasive system of judicial supervision, many jurisdictions, including the US, have concluded that no specific regulation of litigation finance is needed. For example, the Advisory Committee for the US Federal Rules of Civil Procedure has concluded that US judges already have the powers they need to obtain any desired information about litigation funding, and that no further action was needed. That is a sensible decision; it would be wrongheaded to suggest that litigation finance firms like Burford should be treated differently than the many other constituents with interests in pending litigation.

There are nonetheless occasionally suggestions (generally from special interest groups opposed to litigation proliferation generally) that a further regulatory envelope should be created specifically for litigation finance. Given Burford’s size and the pace of the development of the litigation finance market, such an approach might well be to Burford’s benefit in creating barriers to entry for smaller, less experienced and less well-capitalised firms, but we nonetheless see no need for it nor do we see a groundswell of activity in that direction.

It is possible that Burford are being blasé about the risk, but they are a bunch of lawyers (is 'bunch' the correct collective term for lawyers?) and as such would tend to be risk averse. If it was genuinely a material risk to their business I would expect them to have included all sorts of disclaimers in their communications.

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Steve Hill 27th Jul '17 153 of 164

In reply to post #202663

Sorry Tim I didn't mean for my reply to come across as it obviously did to you & I hate the rudeness shown on many bulletin boards.
What I do not understand is what your concerns are - why would authorities want to regulate something that is of public benefit - why do you think the authorities would want to regulate the litigation finance industry & if they did in what way would they regulate it - from my understanding Burford customers are business's that see the financial benefit of funding their legal cases, they are in no way coerced into it & they are not selling their services to vulnerable people.
It is not gambling or spread betting.
I was actually wondering if I have missed something & that actually there is a bad element to what Burford are doing that needs regulating ?

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bestace 27th Jul '17 154 of 164

I found this comment in the interim report interesting as it appears to fly in the face of other comments they have made previously about moving towards portfolio investments and away from single case/binary investments:

...the Petersen investment, while large, is not some one-off extraordinary item that should be treated separately; rather, it is the epitome of our core business. Investments like Petersen and Teinver – large, complex claims requiring financial wherewithal, great lawyers and the kind of significant diligence and management that we routinely provide – are our stock in trade, Burford’s raison d’être. If anything, as time has passed, we have gravitated more to large matters like Petersen and Teinver, notwithstanding their potential lumpiness and volatility
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timarr 27th Jul '17 155 of 164

In reply to post #202703

Hi Steve

I really didn't take it personally, this is an imperfect means of communication.

I can think of four reasons why the industry might end up being regulated: (1) There are some high-profile cases which go against entrenched interests - imagine what might happen if President Trump was sued using one of these? (2) There are some high profile cases where litigation funding is used to promote cases which aren't in the public interest - so using them to restrict freedom of speech, for instance. (3) The use of litigation finance becomes widespread in the legal industry - in time I think that's a distinct possibility, and a mass market will always require some form of regulation to avoid abuse. (4) Powerful lobby groups persuade government that there is good cause to regulate - that's what the article I linked to in the previous post was alluding to.

Now, as bestace's previous post suggests, regulation may well be in Burford's best interests, as it would tend to promote a flight to quality. But in the short term it would still impact the share price.

As for litigation finance being in the public interest - well, maybe. But arguably so was no-win, no-fee litigation and that's led to a race to the bottom of the human condition. There are always unknown unknowns and unexpected consequences, the legal profession is a human invention made up of human designed rules - there's nothing set in stone about it.

But again, to be clear, I like Burford Capital (LON:BUR). I just regard it as my job to weigh up all of the possibilities.


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Steve Hill 27th Jul '17 156 of 164

In reply to post #202719

Hi Tim

Thanks for the clarification, hopefully nothing too much to worry about (other than vested interests / corrupt politicians).
I have to say I couldn't agree more regarding no win no fee, another industry that I think is ripe for regulation is the car hire rip offs which I have been a recent victim & the insurance industry, I was in an accident with an old gentleman in an old car (not a classic a Passat) on by bicycle, there was limited damage to the car & none to the driver & yet the insurance bill came to £7k+ how on earth can they justify that - no wonder Hiscox is on my watch list ; )

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bestace 27th Jul '17 157 of 164

In reply to post #202727

I think a distinction can be drawn between "no win/no fee", car hire fees, PPI, leasehold charges etc. which are all consumer/retail cases, and on the other hand business to business cases which Burford focus on.

Clearly where retail consumers are involved there is likely to be a higher risk of regulation but where that happens it doesn't necessarily mean Burford will be directly affected.

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Steve Hill 27th Jul '17 158 of 164

In reply to post #202735

Couldn't agree more, I think the chance of regulation having a negative impact on Burfords business to be a negligible risk - I guess with Burford it seems such a great company we are all looking for what could be the possible down side - nice problem to have.

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andrea34l 27th Jul '17 159 of 164

The share price seems to have run out of steam since lunchtime...

One thing I wonder is how lumpy their earnings potentially could be considering the nature of the business...?

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JohnEustace 27th Jul '17 160 of 164

I joined the Burford Capital (LON:BUR) earnings call earlier. It was all very positive in my opinion. The slides are on their website:

"A replay facility will be available until Thursday 10 August 2017 by dialing +44 (0) 20 8196 1998 / +1 866 583 1035 with the passcode ‘5490256#’."

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Steve Hill 27th Jul '17 161 of 164

In reply to post #202787

Thanks John, they do present in plain English which is great.

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bestace 27th Jul '17 162 of 164

In reply to post #202787

It was all very positive in my opinion.

I also listened in and I completely agree John. I thought the best comment was from the CIO when he said cash receipts from past investments were being recycled back into new investments to fuel future growth.

One of the bear points I have on Burford Capital (LON:BUR) has been the negative operating cashflow, in that there is an ongoing need to finance the time lags between up front funding of a new investment and the time it takes for cash to be realised after the case has worked its way through the judicial process.

This is what their aggregated cashflow looks like since they started trading in 2009:

Funding of new investments-945,494
Proceeds from realised investments692,819
Other operating cashflow-95,077
Tax paid-17,993
Purchase of fixed assets-2,559
Interest paid-33,031
Dividends paid-83,435
M&A (mostly GKC)-165,702
FX movements-2,132
Net cash outflow before financing ($'000)-652,604

So they've seen a cash outflow in excess of $650m which has been financed by the original IPO proceeds of $290m and the retail bonds of $556m, leaving $194m cash remaining.

While they can continue to generate returns on capital of 60% on completed investments, I'm perfectly happy for this state of affairs to continue, but this is a new growth industry and Burford are likely to be seeing plenty of investment opportunities for years to come which means it could be a long time before they are consistently showing positive operating cashflow.

So I think it's great they are talking about recycling cash from completed cases into new investments as that should tilt the balance of financing the growth away from retail bonds and off-balance sheet funding.

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JohnEustace 27th Jul '17 163 of 164

In reply to post #202843

Also the change to a mixed operating model where, in addition to deploying capital from their own balance sheet, they earn fees for managing funds of other people's money will enable their continued growth.

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JohnEustace 31st Jul '17 164 of 164

From Legal Week today:

"Shepherd & Wedderburn has become the first UK law firm to secure a portfolio financing arrangement with litigation funder Burford Capital.
The Scottish law firm is set to receive an eight-figure sum from Burford Capital, which it can use to offer alternative fee arrangements to clients as well as to grow its reach in commercial litigation and arbitration.
The deal marks the first time a top 100 UK law firm has signed a portfolio financing arrangement of this kind, though US firms have taken up similar deals including some practising in the UK."

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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