Burford Capital Share Discussion Threads

[lazg] 06/5/2021 13:39

loglorry: I am not really claiming this to be true. It is good enough to not sell at current prices, though..l

Anyway: maybe we can inch forward together. I think what may be doable is looking at the initial book value Burford attributed to a certain vintage that is old enough to be mostly finished. Then we could compare that to the realised cash out of that vintage. If wie compare both lets call them book and "hindsight book", we should get a ratio/multiple. We could then use that ratio/multiple on the curren book value per vinatge as a percentage of completion of that vintage to get a better estimate.

Do we have this data? Would that method be flawed?

[williamcooper104] 06/5/2021 13:19

I've a commercial real estate background (mainly developing) On Litfin though I'm just guessing along with everyone else

[loglorry1] 06/5/2021 13:04

LazG I would love this to be true but if it were then in say the last 6 months you'd expect say 20%if that book value to have settled as cash (as cases mature 3yr ave?). That's $2bn of cashflow from settled cases. We haven't seen that.

[lazg] 06/5/2021 12:37

When reaching my valuation, I have made it a two step process:

1. What is "book" for Burford? I do not believe that the accounting principles that determin the book value are really relevant in the lit fin asset class. Therefore, I have based my "fair book" valuation on a proxy for book. In its most basic form the book value is the total value that shareholders of that company would receive if the company were to be liquidated.

If they sold all of their assets to another lit financer they would get far more than what their books say. One example is Peterson. 38.75% of Peterson was sold for $236 million. That is 10x what they paid for 100% of Peterson. As the other cases aren't sold during maturation and their fair value is not usually updated, there is a lot of untapped "fair book" value imo. I would love to see someone trying to do the math on older cases to find out how much difference there is. For my purposes I just think it is "a lot" (maybe not 20x like in Peterson, but it should be significant). It is not unreasonable to assume that the assets could be sold for $10 bn as is. Happy to see someone tweak that number.

2. Step two: Burford is not beeing liquidated, on the contrary. Its dynamic. Brexit and Covid will lead to a lot of litigation and Burford will be in the thick of it. They will grow and they are the market leader. Also the whole lit financing market is booming. Well in that case a 2.5x-3x book valuation does not seem crazy.

The rest is maths:
10^10*2.5/(219x10^6) = USD 114
10^10*3/(219x10^6) = USD 137

[scubadiverr] 06/5/2021 11:54

Some good posts today.WC do you work for a fund? Your knowledge here and in real estate appears well above the norm.

[williamcooper104] 06/5/2021 11:15

The funds are subject to heavy carry - 30 percent from memory over 8 or 12 IRR The funds haven't always invested their funds at par - eg one of the funds bought part of the Peterson claim realising a large profit for Bur The funds become advantageous if Burs book to price/PE becomes a bit too rich Also advantageous if you don't want to see the equity beta/daily mark to market - which is attractive to a lot of institutional investors - but IMO is less important for a private investor (you get less mark to market vol in a fund but much greater liquidity in Bur equity)

[maddox] 06/5/2021 11:02

Hi loglorry,

Again, Finance Cost in 2020 are 0.8% of Invested Assets - so yes I've ignored them.

All the Lit Fin firms are very poorly rated - or extremely good value, dependent on your view point.

BUR reap management and performance fees on-top of the Fund's ROIC - so difficult to argue that the Funds capture more of the ROIC?

[williamcooper104] 06/5/2021 10:58

That's long been the argument about valuation Not so long ago they were trading at a discount to book even with writing off all of the Peterson mark The difficulty has been trying to work out what's a sustainable long term earnings stream and what proportion of earnings eg - Peterson are exceptional - the market didn't like that most of the profit for some years came from non-cash gains

[loglorry1] 06/5/2021 10:43

There are plenty of other expenses not included e.g. interest expense on debt. This is all from memory but last time I looked they were significant.

Good point re time-lag of p/e.

I think 2x-2.5x book is a decent rule of thumb. Also there's the Peterson question which some people like to take out of book value before applying multiples.

Where do other public litigation firms trade relative to book value?

Another interesting question is why be in the stock rather that the fund? There's a good argument to be in the fund if it is capturing more ROIC.

[maddox] 06/5/2021 10:32

BUR's operating expenses in 2020 were 2.4% of their Investment Assets and increased only 6% on 2019, so yes I've ignored them. The legal costs of pursuing the cases in which BUR invests are included in the Invested Capital and thus included in the ROIC and IRR metrics.

The more interesting question is what multiple of it's B/S BUR should be valued on and how do you rationalise that multiple?

I reckon between 2x - 3x that would equate to doubling of assets in 5 or 7 years - a very attractive growth company investment proposition. This would equate to a share price of £20 - £30.

So, what do you reckon?

[pymadams] 06/5/2021 10:00

If you're using net profits should you not be comparing them against the balance sheet value of 2 years ago? (average length of case turnaround)

[loglorry1] 06/5/2021 08:37

@William if that was the case why would the p/e be so low. If they make 30% on book value (of own assets) and the market cap is around book then the p/e would not be sitting at 15x. I accept this is rough since cases are marked up as they near completion etc.

[williamcooper104] 06/5/2021 08:34

It's gross of G&A expenses so you are right that you need to add that in But it's also an unlevered IRR - from memory when I last looked at it the extra costs and the leverage benefits roughly cancelled each other out - such that the post G&A leveraged IRR - which is the best actual measure of shareholder returns, was around the same as their reported IRRs

[loglorry1] 06/5/2021 07:28

Yes there's a lot of costs to take off the gross return on the litigation book and some profit to add back from the fund.

As the litigation book grows this should provide some operational gearing as costs wont rise as quickly as gross profits.

As a rough guide you can look at net profit as a proxy to the real returns shareholders should see on the book. Last time I looked it was around 15%.

[papy02] 06/5/2021 06:47

Hi Maddox.

Agree, but I think ROIC and IRR as used by BUR means at Gross Profit level. We need to deduct operating expenses to get the actual returns they are making as a business.

I found that tough to do (not an accountant), but satisfied myself that the “net IRR” is north of 20% pa, which is still good.

[maddox] 05/5/2021 22:46

Hi Kirkie,

Not all B/S assets are the same, some assets generate far more returns than others. Looking at the latest BUR report for Fin Year 2020:

>> $4.483bn of invested capital (65% own b/sheet = $2.929bn);

>> Consistent track record of 90+% Return on Invested Capital (ROIC) or c.30% IRR; and yet,

>> Market Cap of $2.8bn(£2.01bn).

So currently, Burford is valued at only 95% of its own balance sheet, ignoring the additional funds it manages; but generates outstanding returns on that capital. If those returns are maintained it should double its invested capital in 2.4 years on average. What would you be prepared to pay for asset that doubled on that timeframe? I'd say that it is far more than the current valuation - and I'd very much welcome others' suggestions as to a fair multiple factoring in the uncertainty of realisations and other risks.

Regards Maddox

[jonwig] 05/5/2021 15:00

Kirkie - almost all "modern" companies have low tangible assets, huge intangibles: goodwill, customer relationships, brand value, etc. How are these given an accounting valuation?

Deliveroo, for example, could boast its market IPO valuation using all sorts of assumptions about its worth, which were tested once the market opened. Its "book value" was fiction.

If you compare this to BUR, how do we perform? A few years ago I remember they had never reduced fair value on any case by the time it was resolved. (It might have done more recently, I'm not up-to-speed.) I'd go so far as to say that their fair value calculations are prettyy robust. This means they can be inaccurate but trustworthy, if you see what I mean.

Certainly I prefer an accounting method which forces the company to reassess its portfolio twice a year, against a company which values at cost and updates only on resolution: the guys in the office know full well how their cases are going but aren't telling us! (LIT.)

[kirkie001] 05/5/2021 12:07

LazG - I don't know any kind of company that holds assets (which Burford does) that would trade on any kind of multiple anywhere near 2-3x book (which isn't book, it's some kind of "fair" value) to price ratio.

What are your comparator companies out there that are similar?

Cheers
K

[lazg] 05/5/2021 11:30

Chester, I totally agree with you. It is not unreasonable to value the book at USD 10bn (I don't believe the accounting principles do this asset class justice) and to have the growth and potential lead to an 2-3 book to price ratio, which corresponds to a market cap of USD 25-30 billion. At 219 mn shares thats a fair value of up to USD 116-137.

Who knows what catalyst will be required for the market to notice, but I am holding far past GBP 15.

[tnt99] 05/5/2021 09:49

And to all my Reddit followers woo woo catch the burford express to 15 pound land woo woo!!

[tnt99] 05/5/2021 09:35

Thanks for the reply chester I have a lot invested here all purchased at around the 5-6 pound mark so I believe I should do well it seems others on this site don't respect my opinion however it seems we are aligned in our belief I probably will sell at 15 pounds though

[chester9] 05/5/2021 08:41

This is the only share I own which gives me no negative thoughts. Yes they can lose YPF , yes they can lose Congo but win one and the value to Burford is at least 50% of current share price if YPF case settled then share price £15. In coming years we will not see the many other cases they win. We do know they have the money and talent. I see this share price going one way only for 3-5 years when it may be toppy at £50. This is a winner, after that I suspect I will still want to hold my money in Burford.

[time_traveller] 04/5/2021 20:20

Oof, if you think Argentina would try the patience of a saint, try Congo and Cameroon! TIA!

[tnt99] 04/5/2021 20:06

So Chester do you agree with me this shares true value is 15 pounds and the stars are aligned to reach this level in good time

[desk100] 04/5/2021 19:05

Sorry meant Bogart