Small Cap Value Report (Thu 8 Aug 2019) - BUR, ZTF, WATR, ELCO, BUR (rebuttal), VTC

Thursday, Aug 08 2019 by
78

Good evening/morning, it's Paul here.

To manage expectations today, I'm on the afternoon shift, so estimated completion time of this report is c.6 pm. As usual, I'll update it in sections as I go along. It's a quiet day for small caps news anyway. All done now (17:36)



Burford Capital (LON:BUR)

Yesterday was so dominated by BUR that I didn't get round to looking at many other things. Hence today's reports starts with some catch up items, written by me late on Weds night. Incidentally, I really liked Graham's coverage of Burford on his own website, here.

Another thought occurs to me. It might be that the share price could bounce from here, but will it get back to previous levels? I doubt that, because now it appears (according to MW) that profit is mainly coming from aggressively anticipating the future cashflows from only 4 big cases, then that casts considerable doubt over the sustainability of future profits. That in turn means that a much lower multiple of earnings should be used in valuing the company.

Taking that into account, means that I suspect Burford shares could eventually settle permanently at a lower level - maybe 500-1000p? As Graham points out in his article, given that Burford appears to recognise future profits aggressively, then we should possibly be valuing it at a discount to published NAV, not a premium? It depends on how you look at it.

Interestingly, the Stockopedia computers were negative on Burford, before the recent share price collapse. On 4 Aug 2019, when the share price was 1425p, the StockRank here was very low for a (at that date) £3.1bn company;

5d4b409aeff07BUR_SR.PNG


That has since dropped to 18, as the momentum has obviously dropped this week.

Nobody is claiming that the StockRank system is infallible - it couldn't possibly be, as no system can predict the future. However, I've noticed that ignoring low StockRanks is often a costly mistake - many of my low StockRank personal holdings have done really badly in the last year. With hindsight, if I'd played it safe, and stuck to higher StockRank positions, I'd probably be a lot happier and wealthier than I actually am now. Ho hum, we live & learn. Or maybe that should be: live and make the same mistakes…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

Disclaimer:  

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. 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. ?>


Do you like this Post?
Yes
No
79 thumbs up
1 thumb down
Share this post with friends



Zotefoams plc is a United Kingdom-based cellular material technology company. The Company is engaged in the manufacture and sale of cross-linked block foams. The Company's segments include Polyolefins, High-Performance Products (HPP) and MuCell Extrusion LLC (MEL). Polyolefins foams are made from olefinic homopolymer and copolymer resin. HPP foams include ZOTEK F foams and T-Tubes insulation, made from polyvinylidene fluoride (PVDF) fluoropolymer. Other products include foams made from polyamide (nylon) and PEBA. MEL licenses microcellular foam technology and sells related machinery. The Company offers a range of categories of products, such as AZOTE, including PLASTAZOTE, EVAZOTE and SUPAZOTE; ZOTEK, including ZOTEK F, ZOTEK N and ZOTEK PEBA, and T-FIT. Its products are used in a range of markets, including sports and leisure, packaging, transport, medical, Industrial, building and medical other construction, and other. more »

LSE Price
540p
Change
3.1%
Mkt Cap (£m)
260.8
P/E (fwd)
22.9
Yield (fwd)
1.2

Water Intelligence plc, formerly Qonnectis plc, provides leak detection and remediation services. The Company offers a range of solutions (including products) for residential, commercial and municipal customers. The Company's segments include Royalties from franchisees, Corporate-operated Stores and Other activities, including product and equipment sales. Its geographical segments include US and International. The Company mainly operates in the United States, with operations in the United Kingdom and certain other countries. The Company's subsidiaries include Qonnectis Group Limited (holding company of ALD International Limited), ALD International Limited, American Leak Detection Holding Corp. (holding company of ALD Inc.) and American Leak Detection, Inc. (ALD). ALD International Limited and ALD provides leak detection product and services. more »

LSE Price
281p
Change
 
Mkt Cap (£m)
47.7
P/E (fwd)
20.4
Yield (fwd)
n/a

Elecosoft plc is a United Kingdom-based company. The Company is focused on providing software and related services to the architectural, engineering, construction and digital marketing industries. The Company’s software programs cover project management, construction site management, estimating, timber engineering, 3D design and visualization, and cloud-based digital marketing solutions. more »

LSE Price
78.7p
Change
-0.4%
Mkt Cap (£m)
64.6
P/E (fwd)
16.4
Yield (fwd)
1.1



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


77 Comments on this Article show/hide all

Zipmanpeter 8th Aug 18 of 77
2

In reply to post #502051

Agree - access to Stockranks (and then their components) should be easier and more intuitive.  This is a key differentiator of Stockopedia after all.  I have suggested (via green tab in bottom RHS) direct click through from the QVR scores on each companies page - but would take any better solution from the boffins

| Link | Share
mammyoko 8th Aug 19 of 77
7

Burford Capital (LON:BUR) rebuttal is a class document. The MW report was based on weight rather than significance. Some of the items were old, most were immaterial. Much was innuendo and parts were already well-known.

The real questions are what value is Peterson in the books at and how realistic is it? They sold 10% for $100m but what is their remaining share valued at? Burford Capital (LON:BUR) know, MW does not. Will Burford Capital (LON:BUR) divulge this information?

In any contest of words (let's face it, the valuation of Burford Capital (LON:BUR) will be determined by trust in management which depends on words) between Burford Capital (LON:BUR) and Carson Block, my money is on Burford Capital (LON:BUR) from what I have seen. MW's analysis looked shrill and amateurish to me.

| Link | Share | 1 reply
dscollard 8th Aug 20 of 77
12
 MW's analysis looked shrill and amateurish to me.

Unless of course you are a shorter by profession in which case taking a share from £14 to £4 in 24 hours is a good day's work done pretty professionally.

MW  are ruthless in execution,  targeted a share where sentiment had started to turn negative,  with the fingerprints of an investment guru gone bad (Woodford) on an index that was struggling (AIM) in  the wake of a now infamous fraud (Patisserie Valerie)  and during a period of high market volatility. 

To echo the Spanish Inquisition sketch their  two chief weapons are  timing and execution, and  a flexible relationship with the truth , and,  and

 

Website: runprofits.com
| Link | Share | 1 reply
Paul Scott 8th Aug 21 of 77

In reply to post #501821

Hi andrea34l,

Paul, I would argue that Water Intelligence (LON:WATR) deserves its 'toppy valuation' rather more than Zotefoams (LON:ZTF) where the latter is showing considerably more pedestrian growth.

Not necessarily, because ZTF is currently investing heavily in capex for new factories. So once production from the new factories starts, then growth could shoot up. Existing forecasts for ZTF seem to only be factoring in a small increase in revenues & profits, which could be exceeded - maybe that's why the fwd PER appears high at the moment?

Regards, Paul.

| Link | Share | 1 reply
FREng 8th Aug 22 of 77

In reply to post #502051

Thanks, Nick. It seems to be unavailable on the new site. I agree with Zipmanpeter's comment

| Link | Share
laurie 8th Aug 23 of 77
2

In reply to post #502101

Burford Capital (LON:BUR)

MW  are ruthless in execution,  targeted a share where sentiment had started to turn negative,  with the fingerprints of an investment guru gone bad (Woodford) on an index that was struggling (AIM) in  the wake of a now infamous fraud (Patisserie Valerie)  and during a period of high market volatility. 

...and the CFO was on vacation.  My understanding is that the management team spend most of their time in New York, so when MW published, it would have been c. 3am.  

| Link | Share
pka 8th Aug 24 of 77
2

In reply to post #502096

Hi mammyoko, you wrote:

"The real questions are what value is Peterson in the books at and how realistic is it? They sold 10% for $100m but what is their remaining share valued at? Burford Capital (LON:BUR) know, MW does not. Will Burford Capital (LON:BUR) divulge this information?"

Although this doesn't directly answer your question, a poster called Boris wrote on the FT website: "What also surprises me is how many things Muddy Waters haven't even mentioned but which should be red flags from a first read of the annual report: for example that the company realised an investment by selling it in the secondary market for 100m, but they wrote a put option on it to the buyer, effectively retaining all of the risk. This is accounting gimmickery and significantly inflates profitability and returns."

I found the following note in Burford's 2018 annual report: "Included in net realised gains for the year is $87,197,000 relating to a sale transaction where the Group has written a put option relating to the investment that was sold and derecognised in the financial statements. The fair value of the option at 31 December 2018 is $7,000,000 (2017: $nil) and is included in derivative financial liabilities in the consolidated statement of financial position. There has been no subsequent income or expense following the recognition of the option. The option is only exercisable based on contingent future events and, in the event it is exercised, the Group would recover the underlying entitlement and become entitled to its future value. The cash outflow required to repurchase the asset if the put option becomes exerciseable and was exercised would be $100,000,000 and the maximum exposure to loss for the Group assuming a recovery of zero proceeds would be $100,000,000. The put option expires on the resolution of the contingent event, which could be expected within 12 months."


| Link | Share | 1 reply
Trident 8th Aug 25 of 77

Re Rosenblatt (LON:RBGP), a recently floated law firm funding some contingent liability cases, floated no doubt on the back of the following wind from the Burford Capital (LON:BUR) model announced as below in its recent trading statement, just before the Burford Capital (LON:BUR) debacle broke out:

'The Group continues to make progress in terms of establishing its litigation funding arm. There are currently four cases under consideration for funding and seven in progress. The Group has started to successfully realise revenues from the sale of partial participation rights in its litigation assets to third parties as part of the Board's policy of generating returns from these assets while limiting its risk exposure to individual cases.

At the interim results, the Group expects to update investors on the accounting methodology that will be used to account for these cases on the balance sheet.'

Some interesting parallels?

| Link | Share
CGWM123 8th Aug 26 of 77
3

Burford was a sitting duck for a very well timed attack. Perhaps if the company had listened to investors re the AIM listing, the strange board composition, weak corporate governance and accounting policies etc this would never have happened?

| Link | Share
dscollard 8th Aug 27 of 77
2

@ Gromely you should have laid a wager ..MW's short was  limited to  0.57%

Gladstone did increase its to 0.77% but the net short yesterday was 1.34% .... 

while there may have been numerous smaller shorters and derivatives via spreadbetters (assuming you could get a position) , much of the move was sentiment driven ..another part of the MW targeting - go for a name with a high retail investor ownership


5d4c47abe54da08-08-02-26-Short_Interest_


Website: runprofits.com
| Link | Share | 1 reply
jared007 8th Aug 28 of 77
3

Burford Capital (LON:BUR) is one of my larger holdings so I am naturally disappointed with what has gone on this week. But two things come to my mind as this continues to play out:

1) Although I have suffered, I am now thankful for the principle of diversification. You never know when something like this will come along. Bad news can come out of the blue without too much warning. Investing is risk, and if you did your research, were happy with the view then you should go easy on yourself. Learn what you can, move on.

2) From Paul above: "My feeling is that short sellers should be required to submit such a dossier to the target company, and give them say 7-days to respond privately"

If Burford is genuinely a victim of mis-informed slander here, and successfully prove it (whatever that looks like) - then it does call for a bit of a regulatory shake up. Specifically, I think research firms with clout who are going to publish a shorting dossier must disclose the document to the target in good time AND be excluded from participating in shorting activity for a time (eg, 7 days after publication). In other circles, what MW did this week could be contrued as market abuse, market rumour and even front-running. All very serious things.

Or put another way, if MW absolutely had conviction Burford Capital (LON:BUR) is mispriced and cooking the books, they could have just put a short on without publishing a document. I wonder how successful they would be ...

| Link | Share
shanklin100 8th Aug 29 of 77
4

Quite bizarre that with all the excitement over Burford Capital (LON:BUR), its interim results are still to be loaded on Stockopedia and, despite chasing it, I am still to receive credible explanation for why this is the case. indeed on one of the BUR threads, Ed posted that the delay is not due to Reuters because AIUI they just scan in some numbers from the results RNS and leave Stockopedia to work through the results and make whatever adjustments are necessary.

It would be nice to fully understand the results loading process in terms of who does what, in what order.

| Link | Share
Gromley 8th Aug 30 of 77
2

In reply to post #502191

Yes I just spotted that the Muddy Waters short was reduced on Tuesday the very day the report was rumoured, causing the initial share-price fall.

We could well learn tomorrow that it was closed out completely on Wednesday.

No doubt that Carson Block knows how to play the game.



| Link | Share | 1 reply
Gromley 8th Aug 31 of 77
2

In reply to post #502111

Hi andrea34l,

Paul, I would argue that Water Intelligence (LON:WATR) deserves its 'toppy valuation' rather more than Zotefoams (LON:ZTF) where the latter is showing considerably more pedestrian growth.

Not necessarily, because ZTF is currently investing heavily in capex for new factories. So once production from the new factories starts, then growth could shoot up. Existing forecasts for ZTF seem to only be factoring in a small increase in revenues & profits, which could be exceeded - maybe that's why the fwd PER appears high at the moment?

Regards, Paul.

Agreed Paul, it does seem to me that the forward forecasts for Zotefoams (LON:ZTF) seem a little conservative.

Also there is a c. 20% profits uplift available if they can fix or close their beloved MuCell division - the update here was encouraging but I'm not holding my breath.

On the other side of the equation the governance amber flags on Water Intelligence (LON:WATR) probably should earn it a bit of a discount in valuation.

(Long ZTF, no position currently in WATR)


| Link | Share
bestace 8th Aug 32 of 77
20

A couple of comments on Paul's coverage of the rebuttal from Burford Capital (LON:BUR)

On point 2:

It refutes the $200m damages counter-claim, saying there is no counter-claim.

That's not quite what Burford said. The case cited by Muddy Waters does exist (Epicenter Partners LLC et al v. Burford Capital Limited et al) and is still (only just) ongoing. The plaintiff brought the case in Arizona and Burford successfully argued that the London Court of International Arbitration was the correct venue for the case to be heard, which is why the Arizona case was stayed.

The plaintiff has not filed the case in London apparently due to not being able to find a litigation financing partner (oh the irony!). Its counsel then withdrew from the case in Arizona and they were required to appoint new counsel before the end of July, which they did not do. The judge then set them a final deadline of today to appoint new counsel, which at the time of writing they had not done, so I imagine the judge will now proceed to throw out the case, perhaps as soon as tomorrow.

On point 5:

it seems to me that Burford's accounting for this was not prudent - if something is likely to be a loss, then it should be fully provided for & reported as such.

Burford did write down the investment, a point they confirmed in today's conference call and is in keeping with how they account for adverse litigation events. But they did not treat it as concluded because the appeal was still ongoing. That is consistent with their frequently stated explanation that investments are not treated as concluded until there is no further litigation ongoing, and if there are outstanding receivables once the litigation is concluded, they are derecognised as investments and accounted for as receivables.

It seems to me that several of Muddy Waters' points fall away if you can grasp that last point.

On fair value accounting:

Burford does revalue cases upwards before they're settled. So it's booking profits ahead of settlement, which achieves a similar effect to capitalising costs - boosting profits ahead of cashflow.

This comes up so frequently as a criticism of Burford, but it seems to me it is a criticism of the IFRS 9 accounting standard rather than a criticism of Burford itself. The relevant question in my mind is why does Burford apply IFRS 9 for its investments whereas IMF Bentham apply the Australian equivalent of IFRS38 (intangible assets) and Litigation Capital Management (LON:LIT) applies IFRS 15 (contracts with customers)?

Having looked through the relevant accounting standards (there's an hour of my life I won't get back!) I think it is arguable that Burford's choice of IFRS 9 is more in keeping with the spirit of what the accounting standard setters intended, even though that results in a less conservative form of accounting.

| Link | Share | 1 reply
pka 8th Aug 33 of 77
3

In reply to post #502251

It seems to me that taking out a short position on a stock in advance of releasing a shorting report which is likely to cause that stock's share price to fall is very similar to insider trading. Why is the latter banned by law but the former allowed?

| Link | Share | 2 replies
shipoffrogs 8th Aug 34 of 77
2

In reply to post #502291

I guess it's just the flip of posting something positive one here about a company in which you hold shares.

| Link | Share | 1 reply
xcity 8th Aug 35 of 77
5

I don't understand why there should be a problem with shorters producing reports, though it's much more common in the US. Company brokers produce reports, arguably with the aid of inside info. The shorter's points are either good or they're not. If they don't add information to the market then they will have no impact. If a wrong report halves a share price (it generally won't) then that is a superb opportunity for holders to buy more at a very attractive price.

My experience of short reports is that they are usually much better researched than buy side reports Sometimes they're not very good but those rarely affect the market. As a shareholder, I find them the most useful reports because they usually give me information or perspectives that I didn't have.

| Link | Share
jonesj 8th Aug 36 of 77
6

If companies are allowed to pay brokers to write favourable research reports, then it follows that shorters should be permitted to write their own material. No one is forced to act upon the information.
The sophisticated investor should be capable of interpreting all of this and in the long run, each stock should earn the return that the underlying business justifies.

| Link | Share
Paul Scott 8th Aug 37 of 77
1

In reply to post #502291

Hi pka,

It seems to me that taking out a short position on a stock in advance of releasing a shorting report which is likely to cause that stock's share price to fall is very similar to insider trading. Why is the latter banned by law but the former allowed?

That's a really good point. Since a shorting dossier from Muddy Waters is going to be price sensitive, then immediately taking out a short position before its publication, does indeed look like insider trading. I agree.

Regards, Paul.

| Link | Share | 1 reply

Please subscribe to submit a comment



 Are LON:ZTF's fundamentals sound as an investment? Find out More »



About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

Follow



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis