Up as much as 87% since last Friday, there could be even more to come for this AIM company’s share price, believes analyst Edmond Jackson.
A major court victory helps put capabilities of Burford Capital Ltd (LSE:BUR) back in focus. This litigation finance group takes a view on the outcome of cases and, if successful, gains a share of payouts.
Its share price has been a roller-coaster ride since listing in 2009, multiplying 20 times from around 100p to over 2,000p in less than 10 years, then slumping to 300p amid accounting concerns. Then, Covid disrupted court hearings and the shares traded in a 600-900p range over the last three years.
I drew attention to Burford as a “long-term buy” at 135p in April 2014 after 2013 annual results showed a 25% increase in profit and a 20% increase in income from litigation cases. By March 2017, however, I was concerned at the extent of subjectivity in accounting for growth. I tend to prefer a cash-based approach where only proven returns are accounted for. Some might say, fair value of litigation assets more realistically involves taking a view on outcomes and discounting them to a net present value.
Petersen claims a potential big winner
Another issue back then was much resting on the outcome of relatively few cases – in particular, the “Petersen” claims. These originated in 2015 after the 2012 nationalisation of Argentinian oil company YPF left a group of minority shareholders without compensation.
Through Petersen Energia, they had bought 25% of YPF on the New York Stock Exchange, making the case quite a precedent for international property rights and status of NYSE-listed assets.
Majority shareholder Repsol of Spain sued Argentina in 2014, obtaining a $5 billion payout. Hence, the case is a good test of Burford’s concept of litigation financing (where action otherwise might not happen).
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Together with interest accumulating, any settlement would be in multi-billion dollars – which, according to Burford’s entitlements, would if materially paid out result in multiples of its sterling equity market value of £1.3 billion (based on a stock price last week).
Distraction of the Muddy Waters Research attack
The Petersen case became overlooked, however, after a short-seller published a detailed critique in August 2019, hitting Burford’s stock from around 1,600p to below 700p. While I thought its claim as to Burford being “arguably insolvent” was over-the-top, aspects of the accounting critique reflected my own concerns, and also how the CEO’s wife was chief finance officer.
Burford made a vigorous rebuttal, but its stock never really recovered, and around 1.3% of its issued share capital remains sold short by two hedge funds. There has also been quite a turnover in chief finance officers which begs questions.
Burford’s share price fell briefly below 500p after a 16 March business update delayed publication of the 2022 account. That was because the US Securities and Exchange Commission was challenging Burford’s fair value accounting of its legal assets.
Management not surprisingly headlined the update more positively, citing over $300 million cash receipts in 2022 yet with 2023 offering nearly three times the hearings of last year. “We may well be at a turning point for the portfolio,” it said.
Burford Capital - financial summary
Year-end 31 Dec
|Turnover ($ million)||82||103||163||343||425||370||359||153|
|Net profit ($m)||46.6||65.7||109||249||318||212||165||-72.1|
|Operating margin (%)||62.1||74.9||72.3||79.8||80.9||71.6||66.4||3.1|
|Reported earnings per share (cents)||22.2||31.5||52.9||120||151||97.0||75.4||-32.9|
|Normalised earnings per share (cents)||22.2||31.5||54.8||120||151||100||77.2||-30.7|
|Operational cashflow per share (cents)||-45.1||-9.9||-3.3||-49.1||-111||-3.8||24.6||-267|
|Capital expenditure per share (cents)||0.05||0.2||0.8||0.3||0.1||1.6||0.2||0.1|
|Free cashflow per share (cents)||-45.2||-10.1||-4.1||-49.4||-111||-5.4||24.4||-267|
|Dividend per share (cents)||7.0||8.0||9.2||11.0||12.5||4.2||12.5||12.5|
|Return on capital employed (%)||9.8||13.6||13.5||19.1||16.0||10.3||7.7||0.1|
|Return on equity (%)||15.8||21.0||35.7||29.4||14.6||10.3||-4.5|
|Net fixed assets ($m)||326||371||795||1,338||2,167||2,509||2984||3,391|
|Net debt $m)||-58.4||-86||93||347||408||489||359||854|
|Net assets ($m)||383||434||596||799||1,363||1,533||1,662||1,552|
|Net assets per share (cents)||187||212||286||383||623||701||759||708|
Late Friday 31 March, the whale landed
A New York court issued summary judgment – effectively declaring a complete win against Argentina with respect to liability, with damages yet to be determined.
Burford’s stock jumped 30% to 750p, closing up over 50% on the New York Stock Exchange to around $11, with a follow-through yesterday (Monday 3 April) in London to as high as 1,070p amid reactive elation. It has eased, however, to around 870p, with sellers prevailing early today.
This capitalises Burford at near £1.9 billion, hence adds around £600 million to its market value. That’s relative to a potential total pay-out equivalent to around £4 billion, taking the median of estimations being made. Traders will doubtless speculate for months to the extent of taxation may arise if Argentina co-operates.
A key question is what extent of discount is justified in Burford’s market value given real risks of accruing anywhere near what a court may affirm as due.
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Burford yesterday issued a qualified announcement citing Petersen as one of its four pillars of value in terms of value it could create. Those are my italics for emphasis; lawyers choose their words carefully.
Respecting Argentina’s likelihood to appeal, Burford cited options to “negotiate a resolution...which would certainly result in what would likely be a substantial discount to the judgment amount...or engage in an enforcement campaign against Argentina...”
Perhaps the American lawyers running Burford are inspired by New York hedge fund manager Paul Singer’s waging a 15-year battle with Argentina over defaulted bonds; taking control of a navy ship and trying to seize bank deposits and commercial contracts. Such determination may have contributed to his fund making $2.4 billion out of settlements – albeit a decade ago.
Good luck getting billions out of a country with a CCC- credit rating
Mind, the current international financial context is soaring public debts and inflation, with annual inflation in Argentina at over 100%.
Last October, credit rating agency Fitch added a minus sign to its CCC rating of Argentina’s long-term sovereign credit, citing “severe macroeconomic imbalances and limited external liquidity, which increasingly undermine repayment capacity as foreign-currency debt service ramps up in the coming years.”
Obtaining legal judgment in your favour is one thing, exacting compensation due may be quite another. Admittedly, Argentina continues to make interest payments to international governments to the tune of $14 billion a year.
A year ago, the International Monetary Fund (IMF) approved $44 billion of funding over 30 months to improve Argentina’s public finances and reduce persistent high inflation. I would be surprised if that does not involve over-seeing by the IMF to ensure key priorities be met. Will Argentina have headroom to settle on court damages even if it wants to?
A best-case scenario seems negotiating what can be paid say over 10 years. The potential prize for Burford shareholders could, however, be a series of special dividends also retaining funds for re-investment in legal cases.
If Argentina wants to show it respects international judgments, then even a keenly-fought appeal could end up with material payments to Burford.
All considered, wait for the 2022 accounts
The stock’s easing back shows it remains highly reactive, so unless short-sellers opt to close their positions, perhaps it’s better to let euphoria over the Petersen ruling pass.
Similarly, it could react to much negative adjustment in net assets when the annual results are published after negotiations conclude with the US Securities and Exchange Commission. For what net assets are worth as a valuation anchor here, the last accounted were around 570p a share. But the 16 March update said the 2022 annual report may differ materially from prior disclosures as a result of a new fair value methodology.
If not published by end-April, then under US rules on senior debt this would constitute a default – Burford says it would require refinancing if a waiver is not granted.
I would therefore tend to conclude on a “Hold” stance pending the results, yet a possible initial drop in reaction to re-stating accounts and/or a debt default could provide chance to buy.
With court cases back under way, the next few years should be value-accretive – even if Argentina becomes drawn out, like I expect. Burford is also potentially useful in a portfolio of AIM stocks held for at least two years and at death, as a means to Business Property Relief where no inheritance tax is due. On a medium-term speculative view, therefore: Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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