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

Thursday, Aug 08 2019 by

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;


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…

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77 Comments on this Article show/hide all

DWit199 8th Aug 38 of 77

In reply to post #502321

How can it be insider trading if there are no corporate insiders?
I think that it's more like the "City Slickers" case where journalists bought shares prior to publishing tips in The Mirror newspaper. They were found guilty of market manipulation and one of them spent time inside.

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Paul Scott 9th Aug 39 of 77

In reply to post #502326

Inside information is anything that is price sensitive, as I understand it. You cannot buy or sell a share, if you are in possession of some price sensitive information. That's what my broker told me years ago anyway.

The imminent release of a shorting dossier, from a well-known shorter, is clearly price-sensitive.

Look at what happened to the share price.

Regards, Paul.

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Gromley 9th Aug 40 of 77

In reply to post #502301

Burford Capital (LON:BUR) / Carson Block

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

I agree shipoffrogs, whilst I am somewhat concerned [guarded language] by the ethics of people like Carson Block and I do think that there is scope for better regulation, I cannot see that a blanket ban on taking a position before posting an opinion can be the answer.

Suppose that Block had actually found a smoking gun in the Burford accounts, would it not be justifiable for him to benefit from this?

I personally have little doubt that he is seeking to exploit the share-price movement that his report is creating and if he can be shown to have wilfully represented facts, there might be a case to be had against him.

But actually I think his MO is somewhat more subtle than that - he (mostly) deploys innuendo and questions on matters that do not appear to be obvious from the company's public information.

Burford's response I though was quite good, but it frequently makes the effective point that "we told everyone about about this already on several occasions and the explanation is ...." . If that is really the case then why did the market fall for it?

I can think of three reasons :

1. The company accounts are not a transparent as they could be

When Graham explain the point about Fair Value adjustments vs Realised gains, I immediately felt that the Burford's reporting made sense (I still do) but I also felt that it would be easy to verify the impacts from the accounts, but it was not.

A simple summary of Fair Value adjustments applied (where the carrying value of a case has been reassessed) , Fair Value adjustments realised (Where a previously revalued case has been monetised and therefore recognised as realised) would not be commercially sensitive but would provide so much more clarity to investors.

2. The "analysts" are not up to the job.

Maybe because this is an AIM stock?

If Burford's assertion that the dossier addresses nothing that hasn't been discussed before, then why were the analysts not immediately rebuffing the claims (easier for them to do it quickly than it is for the company) and advising their clients to buy the dip?  I part I suspect it is because the analysts deployed on this company may not be the best. It may also be in part because Block makes his report deliberately a little obtuse, so it's hard to really establish what he is alleging, I loved a passage from the rebuttal :

this final point in the report is basically a long, convoluted morass of text cobbled together, riddled with errors and without much of an organising principle.

3. Because the market swoons at his apparent track-record.

Carson Block apparently (single-handedly) uncovered several frauds amongst Chinese companies which earned him super-star status.

However, it seems to me that his online history is carefully managed and probably redacted. He has had false calls as well as correct calls, but it does not seem easy to find a comprehensive view of his track record. I have been able to find some details of calls he made that were false, but it is not exactly easy to find. Paul referred in a post somewhere to either Block's or Muddy Waters' Wikipedia page, but having looked into both I would just say that if you think wikipedia is a source of independent truth, then think again.

Burford have intimated that if they can find an actionable case against Block then they will pursue it, if they can I wish them well.

They should also though imho consider how they can better communicate information that they believe they have already told us so that it can be unequivocally understood,

As an investor though  I am also prompted to think that if I see something unclear but am "sure" that I know what it means I should probably seek confirmation from the company (and perhaps encourage them to make it clear to the wider market).

Still no position in Burford Capital (LON:BUR) but watching carefully.

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Paul Scott 9th Aug 41 of 77

In reply to post #502281

Hi bestace,

Great comments, thanks!

Sounds like you've been through things with a fine toothcomb, and you've got great credibility here too, given your excellent track record of posting top notch comments on many companies, over the last few years.

Many thanks for your input, as always.

Best wishes, Paul.

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dscollard 9th Aug 42 of 77

In reply to post #502336

re Insider trading: having worked in companies and had "red status" information that is incorrect

From UK Law

Insider dealing. ... Under the Criminal Justice Act 1993, dealing in securities on the basis of inside information, that is, information that is not yet publicly known and which would affect the price of the securities if it were made public. It is a criminal offence in the UK

None of the information used by MW was confidential, it was within  the public domain. 

FWIW, Carson Block is a lawyer by training

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Thornabian 9th Aug 43 of 77

Housebuilders are heavily dependent on help to buy but we should also consider the ever increasingly negative yield world we live in. Europe is only going one way - with high unemployment, weak productivity, and increasingly weak inflation - and Danish banks just issued their first negative 10y mortgage at -0.5% and their 20y is at 0%. Europe is starting to look more and more like Japan of the 80s.

"Here please take my money and I will pay you for it, please buy a house". - it does sound like a potential bubble will be created again but it is going to be good for housebuilders over the next 5 years or so.

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peterg 9th Aug 44 of 77

In reply to post #502186

It seems to me that's key to the success of this strategy. You wouldn't get anywhere trying it on a well researched company with clear accounting practices and transparent income streams. Try it on an aim comany with accounts that are not crystal clear, that is clearly dependent on a few big winning cases covering a lot of losers and who appear to have been at the least generous in the way they've done their accounting, and which is highly rated and it's a very different story. 

The reaction was overdone, but some of it will stick and many people will look with more caution at BUR in the future before investing - which is perhaps a good thing.

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pka 9th Aug 45 of 77

In reply to post #502391

Hi dscollard, you wrote:

"From UK Law
Insider dealing. ... Under the Criminal Justice Act 1993, dealing in securities on the basis of inside information, that is, information that is not yet publicly known and which would affect the price of the securities if it were made public. It is a criminal offence in the UK.
None of the information used by MW was confidential, it was within the public domain."

However, Muddy Waters knew when it took out its shorts that it was soon going to publish a shorting report which was very likely to reduce the price of Burford's shares. That information wasn't in the public domain at the time.

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timarr 9th Aug 46 of 77

In reply to post #502436

However, Muddy Waters knew when it took out its shorts that it was soon going to publish a shorting report which was very likely to reduce the price of Burford's shares. That information wasn't in the public domain at the time.

That only matters if the report contains information that wasn't already in the public domain. As the report relies on the information published by Burford Capital (LON:BUR) that doesn't appear to be true. If buying or shorting in advance of publishing analysis of company data was categorised as inside information then half the market's participants, including a lot of PI's, would be guilty. 

Arguably it could fall foul of the market manipulation rules, if the MW analysis is unreasonable. Again that's likely to be hard to prove unless the analysis is incredibly poor. Given that - for possibly good reasons - Burford's accounts are opaque it's going to be hard to make that stick.

Broadly, having people analyse company data and produce reports is a good thing, as it improves information flow. Sometimes that information isn't favourable to existing shareholders, but that doesn't make it an offence.

There are various civil remedies that Burford could go after MW for, but I don't think there's much chance of making a criminal charge stick. The only completely dubious thing is the conclusion that the company may be technically insolvent. You'd really have to be one-eyed to agree with that, but even that statement is sufficiently caveated to be relatively safe.

FWIW I'm a shareholder here, and I regard the entire affair as a good learning experience. Given the complexity of the business model and its heavy reliance on future earnings I'm tending to think that the price needs to be baselined against book value: the only question is how to arrive at a value that provides a reasonable margin of safety. 

In particular, I'm concerned about the corporate governance issues raised by MW - I had no idea that the CFO was the wife of the CEO, and I'm not aware that it was announced anywhere. Generally,the turnover of CFO's and the lack of independence and longevity of board members is a serious concern. To allay this Burford Capital (LON:BUR) needs to move to the main market, appoint a new CFO and adopt standard good governance policies asap.


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dscollard 9th Aug 47 of 77

In reply to post #502436

MW didn't have "inside" information and therefore cannot have acted on that basis.  They did have information on their own intended action which is a very different thing: I am sure arguments could be made about "market manipulation" but that is a different kettle of piranha and I'd imagine Block is well used to the legal arguments around that.  They cite public information and make inferences based on that : one would have to prove there are deliberate or misleading falsehoods in their dossier. 

An “insider” is defined by Section 57 of the Criminal Justice Act 1993  The prosecution must prove that defendant was an “insider” in the sense they knew they had inside information and that they had it from an inside source.  Inside sources can be direct or indirect.  They can be people who have the inside information through their work or who are themselves already insiders having received the information from another person.
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dscollard 9th Aug 48 of 77

In reply to post #502446

@Tim, our replies crossed ..... more eloquently put than my response.

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timarr 9th Aug 49 of 77

In reply to post #502466

@Tim, our replies crossed ..... more eloquently put than my response.

Well, more longwinded, at least :)


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bestace 9th Aug 50 of 77

In reply to post #502361

That's very kind of you to say so Paul.

A few more comments: I don't think the Burford response has fully addressed all of MW's points, so there are still some questions that need resolving in my mind.

Firstly, if there was no interaction between Burford and Invesco on the Napo recapitalisation, why was the £3m Invesco equity investment specifically directed to paying down Napo's debt to Burford? It feels to me like there is more to this investment than Burford has disclosed, particularly as the Napo/Jaguar merger announced in March 2017 (which allowed Burford to extract its £8m in cash) is subject to an ongoing class action lawsuit.

Secondly they did not really address the whole net vs gross realised gains argument.

Thirdly they conflated insolvency with illiquidity in their response. Clearly those things are linked and most of the commentary around this point is making the same mistake. MW could argue that the existence of negative net assets (on their calculation) is the very definition of technical insolvency, which would apply irrespective of the cash on hand or the company's ability to trade out of that situation or the maturity profile of the liabilities versus that of the assets.

Finally, since I wrote the comments above on the Epicenter/Gray litigation, I see they did manage to appoint counsel just before the deadline for doing so. Which means that particular case against Burford isn't quite dead.

There is other litigation against Burford that MW could have led on if they wanted to perpetrate the general aura of dodginess - the Novoship case for example. I wonder if MW will raise that in round 2.

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CGWM123 9th Aug 51 of 77

In reply to post #502336

No its not. Warren Buffett saying he likes a stock and/or declaring a long position is going to move the market but its not price sensitive and does not preclude him from buying. Or Carl Icahn loading up on Apple and saying he likes it etc...

All the MW information is in the public domain and is not inside information etc.

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shipoffrogs 9th Aug 52 of 77

In Burford Capital (LON:BUR) accounts there is a table disclosing how much they have invested in ongoing investments, which shows:

2016 $378m
2017 $629m
2018 $647m
2019 1H $654m

So, from 2017 the cost of ongoing investments has been quite stable. But from 2016 the fair value of litigation assets has more than trebled (up from $560m to $1,768m).

This mismatch in growth seems surprising.

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Steve Hill 9th Aug 53 of 77

I have been an investor in Burford for a number of years & I like I'm surprised that it seems many investors have not taken the time to read their annual reports, especially Burfords as it is so well written as to actually be an entertaining read.
I can’t believe many investors that knew the company well were taken in by MWs Bear Raid for the following reasons :-

1.) MWs claim they are reliant on a very small number of investments for the majority of their profit & they have a large tail of losses.

This is factually incorrect - of course by cherry picking years as MWs did it looks as if that is the case.

I think from memory their win rate is approx. 75-80%.

They do have a few cases that have added a significant minority to Burfords profit.
However and this is the key point here, these 4 investments were made many years ago when Burford were commiting less than $100m per year to investments.

They are now commiting between 15-20 times more per year than they were when those investments were made & therefore future wins will be spread across many more investments.
Burford was a much smaller company & had a much more concentrated portfolio when these commitments were made.
The future will not be like that - although I’m sure as they have said they will have the occasional “home run !”

2.) They are aggresivley marking up their fair value investments.

The vast majority approx. 2/3rds of their investments are held at cost.

Of those that are marked up the vast majority are only done so in the year prior to conclusion (presumably a number of these will be when there has been a ruling in their favour but where an appeal has been lodged).

The proof is in the pudding, I quote from thier 2017 annual report :-
“ it is rare for us to increase the carrying value of an asset and then later have a result that causes us to need to write down that value. Indeed, we have only twice ever written up an investment that later turned to a loss, amounting to 0.2% of our total write-ups by dollar value. “

They are clearly very, very conservativley marking up the fair value of their cases.

3.) Thier accounting / annual reports are complex & misleading.
This couldn’t be further from the truth.
They are the clearest & best presented reports I have ever read & I think if people took the time to read them before investing then they would not have been taken in by MW’s Bear Raid.

4.) Taking their total profits including Fair Value adjustments as their true profit each year is misleading.
I completley agree - so do Burford. They have to file them incl Fair Value adjustments
That is why they are at pains to break it down in their annual report.
As an invester, it is very simple just take their realised gain as their profit - it really coudln’t be simpler & this is marked so clearly in their annual reports.

Doing so roughly halves their profit, but still makes them a screaming buy as the rapidly growing market leader in a very exciting industry.

5.) They are including "Concluded Cases" as "Recoverd".
This was an initial concern for me, but was firmly squashed in Burfords rebuttal.
Saying that only 4% of concluded cases are yet to be recovered, presumably the vast majority of this 4% are the ones that have just concluded.

All in all I thought the MWs document was ammeturish & I am very surprised & disappointed how many investors gave it credence.
Read Burfords annual reports, they couldn't be clearer or more conservative.

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Julianh 9th Aug 54 of 77

In reply to post #501831

Good morning Frederick

I have been also long  £ARW and have been following the slow unwinding of the short positions. On 07 August CPMG Inc took out a new (or additional) short position (information from the FCA short positions daily update). Maybe that accounts for the sharp fall in the share price over the last three days. I have not yet had a chance to take an in depth look at Thursdays results. But when I do it might still not be possible to assess the long and short cases. Businesses (like ARW and BUR) where the real profits on a purchase can take years to crystallise are inherently more difficult to value.

For me, I think I will watch ARW with caution and re-enter when the trend becomes clearer or when I can make enough sense of the results to be confident in the long case.

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Julianh 9th Aug 55 of 77

In reply to post #502186

If Burford had been on the main market this would not have happened? What difference would that have made? Carillion was on the main market and it's accounts turned out to be unrealistically overoptimistic. And again one of the problems was the valuation of work in progress. 

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Julianh 9th Aug 56 of 77

In reply to post #502521

Hello Shipoffrogs (nice name by the way)

There are several possible reasons why fair value has grown faster than investments

1. as cases draw to their conclusion it becomes easier to assess fair value

2. Burford have sold on parts of their existing cases (specifically Petersen) giving them a clear mark to market value for the remaining portion that they still hold

3. if you are cynical, you might think that BUR may be trying to manipulate fair values in order to show the business in the best light

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Julianh 9th Aug 57 of 77

In reply to post #502526


An excellent and detailed analysis. And actually I find your analysis clearer and more to the point than Burford's own rebuttal. Burford should employ you as their new RNS writer

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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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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