Burford Capital Share Discussion Threads

[winsome] 02/5/2019 17:09

Don't know much about the Shareprophets rag but gather their agenda is to bash anything Woodford holds. This commentary from share price is selective twisting of facts to suit one's own agenda. You can do it with the most perfect of companies. As said above, BUR comment in detail about fair value movements. Their cash generation this year was $100m higher than their Net Income. I assume this covers some of previous year(s) unrealised gains which have now been realised.

[brexitplus] 02/5/2019 17:04

FROM THE BURFORD WEBSITE - I don’t know how long this has been on the website

Of note is

“We specifically eschew any obligation to correct estimates made by financial analysts or to inform the market should we come to believe that our actual performance will diverge from those estimates. ”


“Financial reporting and investment valuation

Burford values transparency in its presentation of financial results and wants to be clear with investors about its approach to those results.

Most of Burford’s income comes from its litigation finance business. Within that business, there are two principal sources of income for accounting purposes, realized gains on investments and unrealized gains on investments. (Realized and unrealized losses will naturally negatively affect income and the principles we set forth here apply equally to losses.)

Realized gains are straightforward: they represent the amount of profit, net of the return of Burford’s invested capital and any previously recognized unrealized gains, on an investment that has either resolved entirely or has been settled or adjudicated such that, in Burford’s view, there is no longer litigation risk associated with the investment. (In the latter event, Burford may discount the anticipated profit in respect of an investment to account for any continuing uncertainty as to the recoverability of any amount.) Burford announces individual investment results that will produce realized gains separately from its financial results only when the individual gain is new information which may be material to Burford.

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.

Burford’s board of directors assesses the fair value of Burford’s investments after the close of each financial reporting period and therefore investors should not expect updates about potential changes in fair value during the course of any given reporting period. Following the close of each financial reporting period, Burford’s board determines the fair values of investments after taking into account the views of management, the operation of the audit process and input from external experts (as it considers appropriate). Generally, that process does not conclude finally until shortly before the release of Burford’s financial results for the relevant period.

Burford is pleased to be followed by a number of research analysts and we are grateful for their efforts to understand and explain our business. They perform a valuable role in assessing our operating performance, the evolution of the litigation finance market and interpreting other relevant industry developments. However, prospective investors and other market participants must appreciate that, due to the confidential, potentially privileged, long-term and uncertain nature of each investment asset, it is very difficult for research analysts to project accurately the likely investment income of the business. Any projections produced by research analysts are not produced on behalf of Burford and Burford takes no responsibility for such projections. As a result, prospective investors and other market participants should not treat, and Burford does not intend to treat, the financial projections produced by research analysts as indicative of the market’s expectations of Burford’s future financial performance. We specifically eschew any obligation to correct estimates made by financial analysts or to inform the market should we come to believe that our actual performance will diverge from those estimates. This is, of course, different to the approach taken by most operating companies, in respect of which research analysts can produce relatively reliable estimates and the relevant company will advise the market if it expects to see performance materially different from the consensus of analyst forecasts. It is important that investors understand that Burford takes a different approach as a result of the different nature of its business.”

[brexitplus] 02/5/2019 16:57

Galatea

Agree with you completely re valuation. To get a complete picture of Burford I suggest posters read the annual report (s) from cover to cover. One of the best annual reports, and websites, out there in the investment field.

[elcapital2018] 02/5/2019 16:47

Is this short time????

[jonwig] 02/5/2019 16:41

The negative operating cashflow has been mentioned here before. A growing company invests in new capital, in future profitability. This might be plant/equipment, it might be R&D.

In Burford's case, the largest single item in the cashflow statement is $738m 'funding of investments'. That's the future growth.

As with other posters here, I struggle to find much merit in the share price article. Of course there is an agenda -

"Woodford holds Burford shares. Woodford as a rubbish investor. Therefore Burford must be a rubbish investment." Not quite Aristotelian logic, as the two premises don't imply the conclusion.

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Incidentally, a tip I've read about: always look for the largest single item in a company account, whether P&L, balance sheet, cashflow. That's where the bodies are buried, or not.

[al101uk] 02/5/2019 16:39

Note on page 8 of the results:

"We compute IRRs by treating our entire investment portfolio (or, when noted, a subset thereof) as one undifferentiated pool of capital and measuring inflows and outflows from that pool. IRRs are computed only as to concluded investments and do not include unrealised gains."

And yes, I think the narrative is more a commentary on Woodford than Burford.

[mad foetus] 02/5/2019 16:37

It is funny that these articles never note the fact that BUR are quite explicit about all of this and even give the figure for the amount of times they have written down a case after its valuation was written up (the answer was de minimis). Also, all this stuff about competition is ironic. Because if they are saying that Burford, which, I think everyone agrees, gets the pick of cases and charges heftily (all its fees back first then 30% of returns typically), cannot make a decent return, then why do they think others can? And why should competition drive down returns? Is there any instance of that ever happening in the legal market?

[galatea99] 02/5/2019 16:37

"My biggest concern is how Burford arrives at its reported profits. When it takes on a case for litigation funding, it values the case higher and higher at each step of the process"

Well, if that is his greatest concern, then he really has not understood very much. Burford only revalue cases when there has been an event which justifies a revaluation, such as a favourable court ruling or something clearly definable. It is not an automatic process, as he implies. This is very clearly explained in Burford's excellent reports to shareholders.

But hey, that's his greatest concern.
Well, whatever suits the narrative.

[al101uk] 02/5/2019 16:35

Hopefully helpful to look at his case one point at a time as it's not the same as Cannacord.

Burford values cases higher and higher at each step of the process, unless the case wins these "profits" are for the fairies.

Unrealised gains made up 60% of income in 2018, but made up 81% in H2. So if Burford loses a few cases, the P&L - not to mention the balance sheet - will take a major hit. Yet Burford is reporting an increased proportion of its profits in this way.

Burford’s valuation works out at around $50 million per employee: compare that to Goldman Sachs at $2 million per employee! And despite having one three-hundredth of assets under management compared to Schroders, it gets half Schroders’ valuation.

Two investments (out of 92) appear to have had a massively distorting effect on profits, racking up 20% of total recoveries and 46% cash gains. So whilst Burford boasts 85% ROIC, if we took these two cases out it would fall sharply to 49%. One of those cases (Petersen) is yet to be heard, but is believed to make up around 20% of Burford’s balance sheet.

The $476 million of balance sheet recoveries to date have come from $113 million invested in eight cases. That’s a very small sample size.

45% of recoveries have come from just 9% of completed or partially competed cases.

Deployed $2.6 billion during 2017/18, yet only half of that between 2009 and 2016, it seems an extraordinary act of faith by investors to assume that these returns can continue at those rates.

As the size of the operation grows, the returns will become far more ordinary as the net is cast more widely over perhaps weaker cases.

If Burford is in a unique market there does not seem to be much of a barrier to entry, beyond having enough cash. Competition will bite.

85% returns will drop, in part due to Burford’s increasing size and in part due to increasing competition.

Against reported earnings of around £240 million, a look at the cashflow statement shows an outflow of $233 million from operating activities. So although Burford is reporting mega-earnings, it is burning cash.

There are some other Red Flags too:

The chairman has not changed since listing
The CEO is married to the CFO.
The auditor has not changed since listing.
There is no sign of Burford wanting to move from AIM to the main market.

[johnwig] 02/5/2019 16:33

But, Minerve, it's your accomplice wiggy's biggest investment. You trolls usually stick together?

[minerve 2] 02/5/2019 16:32

Sometimes one has to do the right thing and resign. This isn't supposed to be cottage industry stuff.

[minerve 2] 02/5/2019 16:30

Actually I didn't know that the CEO and CFO were married. Bad corporate governance. I wonder how that sits with Greenbury and Cadbury?

[minerve 2] 02/5/2019 16:27

Generally that does raise some good questions that investors with brains - that will not be many - should be answering. Some of the issues address the concerns I stated over 6 months' ago when I started to show some of you up as puddings.

[bigbigdave] 02/5/2019 16:26

Shareprophets too late, time to short BUR was at 18 quid, back on the up now investors have seen through the nonsense written by Cannacord.

[lomax99] 02/5/2019 16:14

Here's the article:I have been receiving a few comments and concerns from a number of sources regarding AIM-listed Burford Capital (BUR) – a player in the highly lucrative litigation funding space, and a major part of Neil Woodford's investment empire. If those concerns prove to be correct then Burford Capital is massively overvalued, based on hocus-pocus accounting and is an accident waiting to happen...At the last count - as at 31 March 2019 - Neil Woodford's equity income fund had 5.68% of its assets invested here so a blow-up would cause him yet more bad press publicity and more redemptions as investors reflect on his recent history of blow-up after blow-up: think the AA, Kier, RM2, Prothena, Purplebricks, Provident Financial, Capita...the list goes on and on. Could Burford be added to the list too?My biggest concern is how Burford arrives at its reported profits. When it takes on a case for litigation funding, it values the case higher and higher at each step of the process – but there is no actual cold, hard cash to show for it, only bills. Now obviously, if the case eventually goes on to achieve a win in court - and the recoveries are there - then it will result in a nice big payout. But until the judge rules and the cash is paid up, these apparent profits are for the fairies. After all - and put very simply - each case will have one winner and one loser, and the final determinant of who wins is not decided until the case is heard. So to book profits based on case progress, but without it actually getting to court, strikes me as being insane – and to base a £3.5 billion valuation on the stars lining up looks to be just pure folly.To understand the risks here, I gather that unrealised gains made up 60% of income in 2018, but made up 81% in H2. So if Burford loses a few cases, the P&L - not to mention the balance sheet - will take a major hit. And despite all the assurances in the world, until those cases actually go to court nothing is certain (apart from the wealth of the lawyers!). Yet Burford is reporting an increased proportion of its profits in this way. This method of accounting is referred to as mark-to-market – but valuing a case on its progress (and then finding someone else who might buy it) is very different from a more conservative valuation method which holds back value until there is a win in court. Burford's competitor, IMF Bentham (ASX:IMF), does not mark-to-market and whilst Burford is valued on the market at three times its balance sheet, Bentham's figure is just 1.5. Go figure.Indeed, Burford's valuation appears to be nonsense when we consider it works out at around $50 million per employee: compare that to Goldman Sachs at $2 million per employee! And despite having one three-hundredth of assets under management compared to Schroders, it gets half Schroders' valuation. One might also wonder about Burford's track record of growth, as two investments (out of 92) appear to have had a massively distorting effect, racking up 20% of total recoveries and 46% cash gains. So whilst Burford boasts 85% ROIC, if we took these two cases out it would fall sharply to 49%. One of those cases (Petersen) is yet to be heard, but is believed to make up around 20% of Burford's balance sheet. What happens if the case is lost?The $476 million of balance sheet recoveries to date have come from $113 million invested in only eight cases. That's a very small sample size – and 45% of recoveries have come from just 9% of completed or partially competed cases. Now it could be that Burford has some kind of magic formula, but given that it has deployed $2.6 billion during 2017/18, yet only half of that between 2009 and 2016, it seems an extraordinary act of faith by investors to assume that these returns (however you measure them!) can continue at those rates. Surely, as is a common assumption, as the size of the operation grows the returns will tend to become far more ordinary as the net is cast more widely over perhaps weaker cases. And if Burford is in a unique market, well there are plenty of competitors springing up: there does not seem to be much of a barrier to entry, beyond having enough cash. Surely competition will bite – and even Burford has flagged that investors should not extrapolate past growth going forward.This idiot would therefore conclude that 85% returns (based on accounting rules which ignore the reality of the court case determining the actual outcome) will drop, in part due to Burford's increasing size and in part due to increasing competition. For 2018, Burford reported post-tax profits of $318 million – call that around £240 million. Its market capitalisation is around £3.5 billion so that puts it on a PE of around 14.6. If we take loan capital into account, of $648 million, then it seems that EV/E would come in at around 16.7. It might seem reasonable – but only if those reported earnings actually come to pass. But against reported earnings of around £240 million, a look at the cashflow statement shows an outflow of $233 million (call that £180 million) from operating activities. So although Burford is reporting mega-earnings, it is burning cash. That, for me, is a major Red Flag.There are some other Red Flags too: the chairman has not changed since listing, the CEO is married to the CFO, the auditor has not changed since listing and despite its weighty market capitalisation, there is no sign of Burford wanting to move from AIM to the main market. My view is that the accounting is aggressive to the point of being fruity, the cashflow suggests that reported profits are somewhat of the Alice in Wonderland variety and that the sheer increase in the size of the business would suggest to me that profits and growth are not sustainable at these levels. It looks like a sell to me and the risk of holding seems obvious. With a dividend of 12.5 US cents per share, the yield is trivial. Surely, Neil, if you want to get some cash in the bank, there are far worse places to look?

[miti 1000] 02/5/2019 16:08

The article from Shareprophets is poor (I've read it). Factually, a poorly written load of nonsense.

[galatea99] 02/5/2019 16:05

I had been expecting something from Share "Prophets".

There it is, the usual careful selection of partial odd snippets to suit the pre-determined narrative, the regurgitating of the CG rubbish, accompanied by subtle hints of accounting chicanery, etc, etc, all sewn together very glibly.

No doubt, some will swallow it, just as some will swallow the CG tripe from yesterday.

[greenknight1] 02/5/2019 16:00

Is this meant for the LIT board?

[lucicavi] 02/5/2019 15:56

Im expecting a new portfolio deal with a big law firm shortly and this could jump 150p

[soundbuy] 02/5/2019 15:42

Burford Capital – a screaming short?

Not me..............Share Prophets over on twitter......not had a gander.........can't be ar*sed to register.......

[minerve 2] 02/5/2019 15:26

Maddox

I'm really pleased about your BB.

You can console each other in your investment mistakes and losses. Maybe invite the Burford executives over for a get together and partake in a bit of friendly pork swording. LOL

[winsome] 02/5/2019 15:22

Thanks lomax99. Seems the consensus is that the Cannacord lady is plain bonkers and has probably made a fool of herself. Or she has a hidden agenda.

[maddox] 02/5/2019 14:08

Minerva 2 - just checked-out your profile (nothing) and postings (pointless). We've got a great BB here you on the other hand add nothing - you're filtered.

[lomax99] 02/5/2019 13:19

A view on Cannacord's note by mojomogoz on Stockopedia today:

Cannacord ain’t my G for Burford blood.

There’s nothing smooth and easy in trying to analyse Burford’s past return and appraise the future.

Fully weighting the full cost of capital into a partial return on an investment is insane. It’s like doing a discounted cash flow in an investment assuming there’s no future return. This is in fact the original approach of Benjamin Graham in the 30s when he could pick up shares for less than cash and net realisable assets values (suitably haircut) and so didn’t need to to worry about the future returns generated.

The approach Cannacord has taken if applied to say Somero Enterprises Inc (LON:SOM) would see them assume Somero to face rapidly deteriorating forward sales. It’s not a very good comparison as Somero trade in tangibles whereas Burford Capital (LON:BUR) is intangible. So perhaps something like WPP (LON:WPP) is a better comparator as it trades in intangibles with continued investment and realisation from that. But the real comparison is an investment fund in unlisted assets.

Anyway, that Cannacord can have such a regressive and asynchronous approach compared to modern valuation techniques and still come up with 1100p price target on a business that is all intangibles is a IMO a fairly strong buy signal if you believe they will continue trading decent to well.

The one critique that stands up and should be risk weighted by investors is if cash from realisations where to slow down and lead to a lack of capital for future investments (see more comment below). It’s notable that Burford appear to have put greater emphasis on lines of work that bring quicker resolution so as to have more capital to recycle - sensible.

It’s a problem not dissimilar from that of banks with long term liabilities and short term funding. However, Burford operate at much reduced and v conservative leverage levels compared to a bank as they do not have the magical balance sheet creation capability of banks (but they do have RoEs that commodity business banks can only fantasise about). This is why they have relied on more ‘off balance sheet’ financing in recent years with funds and sovereign wealth coinvestor.

The SWF co invest arrangement is genius and provides positive leverage on return for Burford with no downside consequence to that leverage. The funds are okay - an extra bit of return that’s off balance sheet but really someone else is getting most of the upside and it would be much nicer if Burford had the capital on balance sheet...but it does mean they keep a capital source open that continues to fund and take pressure off of balance sheet capital as they seek to grow so it’s a necessary evil right now. Once more mature field i assume they would close funds and fund investments direct from much bigger balance sheet with occasional capital returns too to investors.

Overall, I think the Cannacord banalysis is a really quite a good support for why you should invest in Burford. It’s super hard to give a fair value but i think it’s much higher with many years of growth and compounding high returns on capital to come. They even have the beauty of much more diversified investments without any reason why returns should decline. The valid risk of delayed return mentioned above is lessened by diversification and is also a bit Armageddon-ish in that it’s saying that primarily US legal entities plus entities that would struggle to operate as an illegal in eyes of US will stop obeying legal adjudication as times are tough...possible but a bit fall and ruin of the West.

I love a bit of dissonance and misperception. Burford’s right up my street. But I know my style takes patience...it will bob when others weave but it means I don’t tend to get caught too heavily in the market flow and market traumas when they come.