BUR.L - Burford Capital

[Normax59]

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bur-l-burford-capital/msg376065/#msg376065

 

You can calculate Jeffries' $2.5b estimate through the documents you posted. There's a good academic case study on the situation as well that mirrors BUR's damages argument.

 

OK, I see three different Jefferies "Assumed Payoff" scenarios: $1.5 billion, $2.5 billion, and $5 billion. Am I understanding you correctly in that you are saying that the calculations in the document I attached line up with the $2.5 billion scenario?

 

Re: "good academic study" -- are you referring the one I posted, or something else? If the latter, can you link to it?

 

If Petersen loses (which in turn affects Eton Park), P/BV is probably ~1.8x. If BUR wins, ~0.8x. The issue is winning and collecting in a reasonable amount of time. The past two years' returns are not indicative of the future, though I'm not saying it's impossible for BUR to have good years again.

 

If Petersen outright loses the case then Eaton Park is probably a zero as well. I disagree that BUR (and friends) have to "win" though. Argentina could settle, just like it did with Repsol.

 

I agree that collecting from Argentina is difficult due to its perpetual fiscal and political difficulties, but Repsol and Elliot Management have done it successfully.

 

Finally, there's outstanding cash flow issues Normax59 has pointed out that we don't have enough data to resolve yet. This may confirm MW allegations or ultimately be the effects of BUR's business model change to pursue dissenter's rights cases.

 

Can you be more specific? The idea is that BUR's earnings are not converting to cash and thus, aren't really "earnings" ?

 

Tl;Dr: ~640 GBP is a good price relative to peers, but there are many issues to consider between future industry returns and BUR-specific accounting. I don't think BUR is a bad purchase at this price but there's too much risk for me at current valuation.

 

Fair enough

 

My comments in bold

 

Re: The earnings, cash flow etc. I haven't really checked up on this in a long time so hopefully I can remember everything.

 

Burford's cash flow statement mirrors that of KKR, BX etc. where their total proceeds from and capital provided to investments runs through operating cash flow. Unlike, say BAM. Because of the way realized gains are recognized on their income statement (the reverse entries that I think were pointed out on here before the MW report) their income statement in that regard matches loosely to cash accounting and IMO is a better barometer for "cash flow" to shareholder's. It'll look more like KKR's distributable earnings metric.

 

My suggestion, and what I did to get a dirty idea, go through each year and strip out the unrealized gains from the income statement, then adjust the reserve account for these unrealized gains on the balance sheet to get an understanding of what the book value is made out of, from the figures I have $743m of their book value in fair-value gains, with retained hard earnings of $173m with div distributions of $130m up to 1H19.

 

Stripped out earnings w/o fv changes in 1H19 was $67.5m with the $98m minus some transactions costs from the Petersen sale. So they were pretty reliant on Petersen for the half. It's not really surprising that 2h would be bad given they've restricted themselves on selling Petersen in any meaningful way until a decision and they've pulled on the string almost as far as they can. They've been reliant on Petersen, and to a lesser extent the Teinver sale, since 2017.

 

I had an expected profit from unrealized gains estimation laying around based on some of the quantum allocation figures they presented previously that I'll try to explain. Basically if we're using their past figures of expected profit from currently recognized unrealized gains and the quantum and timing allocations that they give in the 2018 annual report i.e. only 33% of total realized gains were previously recognized as unrealized gains a year out, 10% two years out etc. Allocate whatever amount of unrealized gains you want to each quantum.

 

For my FY 2018 calculation I took their figure 39% of unrealized gains in their 'investment' of 1.592 billion, and it equated to $620m of unrealized gains.

 

I tried to be conservative:

 

95% allocated to 33% already recognized: $1.787b

2.5% allocated to 10%" " ": $155m

2.0% allocated to 8% " "  ": $155m

0.5% allocated to 5%" " ": $62m

 

Total expected profit: 2.159b on $620m of unrealized gains already recognized.

 

To me it implies they are expecting Petersen to come in at $2b or they've been aggressively recognizing unrealized gains. This whole company still seems like a binary option on the Petersen outcome.

 

wrt to IRR, they're doing more appraisal right's litigation in their complex strategies (h/t Schwab for finding this), these kinds of transactions boost their IRR because they get the capital back quickly, but it'll hurt their ROIC over time because returns are razor thin.

 

Also, allocate whatever kind of costs you want to IRR, but something I don't think has been discussed is that they can't allocate 100% of their capital to the investments, they have to use some cash just for liquidity etc. that generates a less than spectacular return. They put maybe 85-90% of their capital into investments.. Either way, it knocks your IRR down a little bit. 

[DeepValuePlay]

I think current share price is very attractive - it represent a 4 or 5 P/E multiple. The MW report scared everyone but had little merit to it in my opinion. 2H 2019 was very weak with virtually no revenues. The reason is not fraud or bad investments but just that very few investments had a resolution - management mentioned that there were no positive resolutions but also no negative ones... just very little activity - this is anti cyclical so could have a great 1H 2020 even during a Corona inflected recession. In fact management already stated January was great!

I went through the company's filings and the short thesis.

 

It looks like a pretty good business, but hard to gauge looking at the financials. The only way to figure out what's going on in the business is through the cash on cash IRR statement that they have:

https://www.burfordcapital.com/shareholders/investment-portfolio/#concluded

 

This indicates a 32% return IRR on invested capital. It does not seem to include SG&A, which is 7-8% of invested capital annually, so say net IRR is actually 25%. Probably does not include tax but let's ignore that for now and say 25%.

 

The company is currently trading around book value, so I got interested. After all, not every day you get to invest in a high IRR business at book value.

 

But then it hit me that the table that computes the 25% IRR has nothing to do with book value, since it includes quite a lot of fair value markups. So if HY2019 investments are 1.7B$, the cash investment is probably around 1B$. So the 25% is on 1B, not 1.7B.

 

Hence if I am paying around 2B$ for the company (current EV), I am actually getting a 1B$ worth of assets on which they are making me my 25%, a book value of 2.

 

Now this doesn't sound like the best deal in the world to me, it actually sounds like fairly priced to moderately cheap.

 

Taking into account that it is extremely difficult to make predictions regarding future returns, I would say that I am not that interested in the current price. Maybe if the EV hits something close to their cash investment in the litigation assets - but that is another 60% down from here.

 

Yes, management seems pretty good and an interesting business but too opaque and not cheap enough in the bottom line.

 

P.S. I wasn't too impressed by the short thesis except that the company was way overpriced.

 

I don't agree with the way you analyze this. You removed the fair value gains from the "investments" balance sheet item. These fair value gains are mostly Peterson - I agree that if they lose the Peterson case they are currently priced fairly, BUT this is an unlikely scenario. Burford has a great track record of being conservative with their FV adjustments. Also, they just sold 10% of the Peterson case for $100M mostly to third parties - Let me promise you these third parties had top legal experts look at this. If they sold it at a $1B valuation they probably think they'll get more. Perhaps significantly more. No reason to think they can't make a high IRR on an already adjusted investment. If Peterson is a win - which most legal experts seem to think it will be than you can buy this now under tangible book.

 

I think this is a great investment at this crazy Corona times - courts rule regardless of the virus - and we already know January was great.

 

Just my opinion.

[LaGrandeBelleza]

I think current share price is very attractive - it represent a 4 or 5 P/E multiple. The MW report scared everyone but had little merit to it in my opinion. 2H 2019 was very weak with virtually no revenues. The reason is not fraud or bad investments but just that very few investments had a resolution - management mentioned that there were no positive resolutions but also no negative ones... just very little activity - this is anti cyclical so could have a great 1H 2020 even during a Corona inflected recession. In fact management already stated January was great!

I went through the company's filings and the short thesis.

 

It looks like a pretty good business, but hard to gauge looking at the financials. The only way to figure out what's going on in the business is through the cash on cash IRR statement that they have:

https://www.burfordcapital.com/shareholders/investment-portfolio/#concluded

 

This indicates a 32% return IRR on invested capital. It does not seem to include SG&A, which is 7-8% of invested capital annually, so say net IRR is actually 25%. Probably does not include tax but let's ignore that for now and say 25%.

 

The company is currently trading around book value, so I got interested. After all, not every day you get to invest in a high IRR business at book value.

 

But then it hit me that the table that computes the 25% IRR has nothing to do with book value, since it includes quite a lot of fair value markups. So if HY2019 investments are 1.7B$, the cash investment is probably around 1B$. So the 25% is on 1B, not 1.7B.

 

Hence if I am paying around 2B$ for the company (current EV), I am actually getting a 1B$ worth of assets on which they are making me my 25%, a book value of 2.

 

Now this doesn't sound like the best deal in the world to me, it actually sounds like fairly priced to moderately cheap.

 

Taking into account that it is extremely difficult to make predictions regarding future returns, I would say that I am not that interested in the current price. Maybe if the EV hits something close to their cash investment in the litigation assets - but that is another 60% down from here.

 

Yes, management seems pretty good and an interesting business but too opaque and not cheap enough in the bottom line.

 

P.S. I wasn't too impressed by the short thesis except that the company was way overpriced.

 

I don't agree with the way you analyze this. You removed the fair value gains from the "investments" balance sheet item. These fair value gains are mostly Peterson - I agree that if they lose the Peterson case they are currently priced fairly, BUT this is an unlikely scenario. Burford has a great track record of being conservative with their FV adjustments. Also, they just sold 10% of the Peterson case for $100M mostly to third parties - Let me promise you these third parties had top legal experts look at this. If they sold it at a $1B valuation they probably think they'll get more. Perhaps significantly more. No reason to think they can't make a high IRR on an already adjusted investment. If Peterson is a win - which most legal experts seem to think it will be than you can buy this now under tangible book.

 

I think this is a great investment at this crazy Corona times - courts rule regardless of the virus - and we already know January was great.

 

Just my opinion.

 

Third parties such as the LPs of their own funds? If Petersen was such a clear win it would already be priced in right now don't you think? That is the implied odds of success for the case would be much higher, which is not the case unless you ask Burford management. Toying around with these figures and the proportion of Petersen at the BS was actually what lead BUR to become so overvalued priorly.

[DeepValuePlay]

I think current share price is very attractive - it represent a 4 or 5 P/E multiple. The MW report scared everyone but had little merit to it in my opinion. 2H 2019 was very weak with virtually no revenues. The reason is not fraud or bad investments but just that very few investments had a resolution - management mentioned that there were no positive resolutions but also no negative ones... just very little activity - this is anti cyclical so could have a great 1H 2020 even during a Corona inflected recession. In fact management already stated January was great!

I went through the company's filings and the short thesis.

 

It looks like a pretty good business, but hard to gauge looking at the financials. The only way to figure out what's going on in the business is through the cash on cash IRR statement that they have:

https://www.burfordcapital.com/shareholders/investment-portfolio/#concluded

 

This indicates a 32% return IRR on invested capital. It does not seem to include SG&A, which is 7-8% of invested capital annually, so say net IRR is actually 25%. Probably does not include tax but let's ignore that for now and say 25%.

 

The company is currently trading around book value, so I got interested. After all, not every day you get to invest in a high IRR business at book value.

 

But then it hit me that the table that computes the 25% IRR has nothing to do with book value, since it includes quite a lot of fair value markups. So if HY2019 investments are 1.7B$, the cash investment is probably around 1B$. So the 25% is on 1B, not 1.7B.

 

Hence if I am paying around 2B$ for the company (current EV), I am actually getting a 1B$ worth of assets on which they are making me my 25%, a book value of 2.

 

Now this doesn't sound like the best deal in the world to me, it actually sounds like fairly priced to moderately cheap.

 

Taking into account that it is extremely difficult to make predictions regarding future returns, I would say that I am not that interested in the current price. Maybe if the EV hits something close to their cash investment in the litigation assets - but that is another 60% down from here.

 

Yes, management seems pretty good and an interesting business but too opaque and not cheap enough in the bottom line.

 

P.S. I wasn't too impressed by the short thesis except that the company was way overpriced.

 

I don't agree with the way you analyze this. You removed the fair value gains from the "investments" balance sheet item. These fair value gains are mostly Peterson - I agree that if they lose the Peterson case they are currently priced fairly, BUT this is an unlikely scenario. Burford has a great track record of being conservative with their FV adjustments. Also, they just sold 10% of the Peterson case for $100M mostly to third parties - Let me promise you these third parties had top legal experts look at this. If they sold it at a $1B valuation they probably think they'll get more. Perhaps significantly more. No reason to think they can't make a high IRR on an already adjusted investment. If Peterson is a win - which most legal experts seem to think it will be than you can buy this now under tangible book.

 

I think this is a great investment at this crazy Corona times - courts rule regardless of the virus - and we already know January was great.

 

Just my opinion.

 

Third parties such as the LPs of their own funds? If Petersen was such a clear win it would already be priced in right now don't you think? That is the implied odds of success for the case would be much higher, which is not the case unless you ask Burford management. Toying around with these figures and the proportion of Petersen at the BS was actually what lead BUR to become so overvalued priorly.

 

Well... per management there was enough demand for the entire deal to happen without the LPs and the majority of the sale was to third parties. My understanding is that the funds' LPs wanted a piece too and Burford couldn't say no. Regarding it being priced in - if I believed that I would be buying an index fund.

 

Unrelated - what is going on with BUR share price?? down on down days.. down on up days.. are there any news I'm unfamiliar with?

[Ronchong]

Taking a guess here but it seems to be for technical reasons. Woodford and his protege Mark Barnett were two of Burford largest shareholders. After Woodford blew up, redemptions grew at the three funds Mark Barnett is overseeing. Already, Invesco has sold down Burford twice since the start of the year. Throw in the coronavirus (resulting in more underperformance and more redemptions) and the abritrageur looking to capitalise on this and you have a declining share price.

 

That said, Burford is starting to get interesting at this level. Very soon, one may be able to buy Burford at Ex Petersen NAV.

[LaGrandeBelleza]

I think current share price is very attractive - it represent a 4 or 5 P/E multiple. The MW report scared everyone but had little merit to it in my opinion. 2H 2019 was very weak with virtually no revenues. The reason is not fraud or bad investments but just that very few investments had a resolution - management mentioned that there were no positive resolutions but also no negative ones... just very little activity - this is anti cyclical so could have a great 1H 2020 even during a Corona inflected recession. In fact management already stated January was great!

I went through the company's filings and the short thesis.

 

It looks like a pretty good business, but hard to gauge looking at the financials. The only way to figure out what's going on in the business is through the cash on cash IRR statement that they have:

https://www.burfordcapital.com/shareholders/investment-portfolio/#concluded

 

This indicates a 32% return IRR on invested capital. It does not seem to include SG&A, which is 7-8% of invested capital annually, so say net IRR is actually 25%. Probably does not include tax but let's ignore that for now and say 25%.

 

The company is currently trading around book value, so I got interested. After all, not every day you get to invest in a high IRR business at book value.

 

But then it hit me that the table that computes the 25% IRR has nothing to do with book value, since it includes quite a lot of fair value markups. So if HY2019 investments are 1.7B$, the cash investment is probably around 1B$. So the 25% is on 1B, not 1.7B.

 

Hence if I am paying around 2B$ for the company (current EV), I am actually getting a 1B$ worth of assets on which they are making me my 25%, a book value of 2.

 

Now this doesn't sound like the best deal in the world to me, it actually sounds like fairly priced to moderately cheap.

 

Taking into account that it is extremely difficult to make predictions regarding future returns, I would say that I am not that interested in the current price. Maybe if the EV hits something close to their cash investment in the litigation assets - but that is another 60% down from here.

 

Yes, management seems pretty good and an interesting business but too opaque and not cheap enough in the bottom line.

 

P.S. I wasn't too impressed by the short thesis except that the company was way overpriced.

 

I don't agree with the way you analyze this. You removed the fair value gains from the "investments" balance sheet item. These fair value gains are mostly Peterson - I agree that if they lose the Peterson case they are currently priced fairly, BUT this is an unlikely scenario. Burford has a great track record of being conservative with their FV adjustments. Also, they just sold 10% of the Peterson case for $100M mostly to third parties - Let me promise you these third parties had top legal experts look at this. If they sold it at a $1B valuation they probably think they'll get more. Perhaps significantly more. No reason to think they can't make a high IRR on an already adjusted investment. If Peterson is a win - which most legal experts seem to think it will be than you can buy this now under tangible book.

 

I think this is a great investment at this crazy Corona times - courts rule regardless of the virus - and we already know January was great.

 

Just my opinion.

 

Third parties such as the LPs of their own funds? If Petersen was such a clear win it would already be priced in right now don't you think? That is the implied odds of success for the case would be much higher, which is not the case unless you ask Burford management. Toying around with these figures and the proportion of Petersen at the BS was actually what lead BUR to become so overvalued priorly.

 

Well... per management there was enough demand for the entire deal to happen without the LPs and the majority of the sale was to third parties. My understanding is that the funds' LPs wanted a piece too and Burford couldn't say no. Regarding it being priced in - if I believed that I would be buying an index fund.

 

Unrelated - what is going on with BUR share price?? down on down days.. down on up days.. are there any news I'm unfamiliar with?

 

That's what they claim but I'm being extra careful here not taking anything they say at face value, they've already been quite dodgy in the past. I would like to see 400GBX for an entry.

 

My point regarding Peterson comes down to how do you actually calculate the odds they are assigning to it are theoretically right? Nobody knows their counter parties, the mark-ups based on market demand could very well be not that accurate if you ask me. Not a claim for strong EMH but rather genuinely asking how to price this.

[Edward]

Very soon, one may be able to buy Burford at Ex Petersen NAV.

Probably a good idea. I wouldn't want to pay up for one case as if it's in the bag.

 

Also would like to get a good deal on the franchise. I think I would start getting interested around 350p per share. At 200p it's probably a buy (about the original cost of the portfolio minus the debt).

 

It's a pretty good business, but I want a discount for being opaque and lumpy.

[Edward]

Finally the stock got under 300p, getting actually interesting at these prices. Might go for the 2022 bonds though. YTM is around 15%.

 

https://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary/XS1088905093IEGBPUKCP.html?lang=en

[SnarkyPuppy]

Finally the stock got under 300p, getting actually interesting at these prices. Might go for the 2022 bonds though. YTM is around 15%.

 

https://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary/XS1088905093IEGBPUKCP.html?lang=en

 

These look interesting.  I can't find on Etrade or Fidelity inventory - is it possible I'm not looking correctly or just difficult to access as a retail investor?

[Ronchong]

Started a small position here. At the current price of 1.3x - 1.4x it's cost of investment, Burford seems like a "heads I win a lot, tails I don't lose much" kind of opportunity if they can achieve the ex-Petersen ex-Teinever ROI of 39% they claim on the remaining cases.

 

Market seems to imply that Petersen will fail and that Burford would not have any fund management incentives accrued to it, be it the SWF or any of its funds.

 

On the other hand, if things work out, Burford could potentially come out a lot more powerful than it once was. Not implying anything but in the gray estate case that was highlighted by MW, I found it interesting that several law firms are not willing to go against Burford due to a conflict of interest.

 

[SnarkyPuppy]

Does anyone have the math on what Petersen is currently booked for?  I had thought others had backed into $800mm - but seems high given net book is $1.4bn?

 

 

[racemize]

Does anyone have the math on what Petersen is currently booked for?  I had thought others had backed into $800mm - but seems high given net book is $1.4bn?

 

I have it somewhere between $400-$600

[SnarkyPuppy]

Does anyone have the math on what Petersen is currently booked for?  I had thought others had backed into $800mm - but seems high given net book is $1.4bn?

 

I have it somewhere between $400-$600

 

Ok I have the following but triangulating different notes (I don't believe they've released a full 12/31 B/S yet)-

 

160 Cash

180 Shorter Duration Investments

1000 Litigation and other investments at cost

400 Peterson

-790 Liabilities and NCI

= 950 BV

/ 218 SO

= 4.36 USD BV per share

= 351 GBp BV per share

[racemize]

Does anyone have the math on what Petersen is currently booked for?  I had thought others had backed into $800mm - but seems high given net book is $1.4bn?

 

I have it somewhere between $400-$600

 

Ok I have the following but triangulating different notes (I don't believe they've released a full 12/31 B/S yet)-

 

160 Cash

180 Shorter Duration Investments

1000 Litigation and other investments at cost

400 Peterson

-790 Liabilities and NCI

= 950 BV

/ 218 SO

= 4.36 USD BV per share

= 351 GBp BV per share

 

Or you can just go with equity - all mark-ups, from 2019 H1, which I have at ~$850.

[nspo]

Does anyone have the math on what Petersen is currently booked for?  I had thought others had backed into $800mm - but seems high given net book is $1.4bn?

 

I have it somewhere between $400-$600

 

Ok I have the following but triangulating different notes (I don't believe they've released a full 12/31 B/S yet)-

 

160 Cash

180 Shorter Duration Investments

1000 Litigation and other investments at cost

400 Peterson

-790 Liabilities and NCI

= 950 BV

/ 218 SO

= 4.36 USD BV per share

= 351 GBp BV per share

 

Okay so trading at about book, likely growth in BV moving forward and uncorrelated asset class. Where do you think a fair multiple of P/B should be? Thanks

[nspo]

https://www.cityam.com/burford-capital-shares-jump-as-it-predicts-coronavirus-litigation-boom/

 

 

[Jurgis]

https://www.cityam.com/burford-capital-shares-jump-as-it-predicts-coronavirus-litigation-boom/

 

Can we sue it if there is no coronavirus litigation boom?

 

Oh wait.

 

::)