An original “buy” idea at 135p nearly a decade ago, Burford worked out hair-raisingly well. Its stock had soared to over 2,000p by August 2018, then slumped a year later in a short-selling attack. Covid took it back to 360p in March 2020 amid fears of court cases stymieing progress.
Late last Friday, the whale landed: an international court in New York set damages for the expropriation of shareholders in YPF, a NYSE-listed oil company nationalised by Argentina, at $16 billion (£12.8 million) which is the high end of expectations. It includes interest besides recompense since 2012.
The stock spiked from near 1,100p to over 1,300p late last Friday, capitalising it near £3 billion. Burford is entitled to 35% of proceeds in the (main) “Petersen” case it has backed, and 73% in the “Eton Park” case (a hedge fund-related claim), implying over £5 billion due if Argentina fully settles.
News arrives alongside likely strong Q2 results
Yesterday, and despite having had the weekend to mull a better-than-expected win, the stock dropped 50p but closed roughly level around 1,300p. This reflects justified investor wariness over what exactly it will evolve. Burford is very much in the frame this week, however, with interim results due tomorrow.
These could attract further buying given Friday’s announcement noted the Petersen ruling “a major milestone...and we continue to see momentum in our overall portfolio and continued demand for our capital and services”.
When I drew attention to Burford in April, the stock had jumped from around 700p to 870p in response to the court declaring a complete win against Argentina, with damages to be determined.
Other things being equal, the market is so far crediting around 600p a share – or £1.3 billion – to Burford’s share of the Petersen claims. Deciphering the odds, it is unclear what extent Argentina will settle, which implies stock volatility ahead. Yet things may not be equal: tomorrow’s second-quarter and interim results could show further momentum after the first quarter achieved like-for-like operating income up 251% to $327 million with net income at $259 million.
This is in context of Burford’s long-term financial trend starting to pick up again, post-Covid:
Burford Capital - financial summary
Year-end 31 Dec
|Turnover ($ million)||82||103||163||343||425||366||328||217||319|
|Net profit ($m)||46.6||65.7||109||249||318||301||143||-28.8||30.5|
|Operating margin (%)||62.1||74.9||72.3||79.8||80.9||74.0||63.7||30.7||60.8|
|Reported earnings per share (cents)||22.2||31.5||52.9||120||151||137||65.2||-13.1||13.8|
|Normalised earnings per share (cents)||22.2||31.5||54.8||120||151||142||67.2||-10.9||17.4|
|Operational cashflow per share (cents)||-45.1||-9.9||-3.3||-49.1||-111||-125||24.5||-267||-210|
|Capital expenditure per share (cents)||0.05||0.2||0.8||0.3||0.1||1.6||0.2||0.1||0.2|
|Free cashflow per share (cents)||-45.2||-10.1||-4.1||-49.4||-111||-125||24.5||-267||-210|
|Dividend per share (cents)||7.0||8.0||9.2||11.0||12.5||4.2||12.5||12.5||6.3|
|Return on capital employed (%)||9.8||13.6||13.5||18.2||14.8||14.9||6.4||1.8||4.5|
|Net fixed assets ($m)||326||371||795||1,338||2,167||2,509||3,134||
|Net debt $m)||-58.4||-86||93||347||408||489||359||854||1,159|
|Net assets ($m)||383||434||596||799||1,363||1,533||1,763||1,696||1,743|
|Net assets per share (cents)||187||212||286||383||623||701||805||774||797|
While it seems unlikely that Burford will net over £5 billion equivalent from Argentina – and in a worst-case scenario, nothing – its current market value offers a risked reckoning, against which it is possible to focus on the wider business prospering.
Scope exists for Burford to create certainty, selling on the claim at some point, for cash it could then deploy for legal cases.
But mind, there is a long way to go – to exact substantial cash from a nation in dire financial straits.
Argentina’s finances imply a discounted settlement ahead
Last Friday’s announcement made clear, and respecting litigation judgments generally settling for considerably less than court judgments: “With an enforceable judgment in hand, plaintiffs will either need to negotiate a resolution of the matter with Argentina, which would certainly result in what would likely be a substantial discount to the judgment amount in exchange for agreed payment, or engage in an enforcement campaign against Argentina which would likely be a substantial discount to the judgment amount in exchange for agreed payment...”
While Argentine nationalists may point out that this is a New York judgment, it will be difficult for Argentina to ignore this, and further appeals rack up more interest due.
A more realistic issue is Argentina simply not having cash to pay, being dependent on loans – or gifts – from the International Monetary Fund (IMF). “Disbursements” is the IMF’s technical term.
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Some Burford shareholders take heart that Argentina is a natural resource-rich country, with assets potentially to sell. It is a similar argument to those who say that the UK is the fifth-wealthiest nation globally, therefore NHS spending and benefits generally can rise (disregarding public debt).
The cash context is Argentina’s net foreign exchange reserves excluding liabilities estimated at a $4.5 billion deficit, hence there is no money to pay this compensation – irrespective of its natural reserves.
Argentina has made payments to some creditors by way of issuing fresh public debt, but is currently locked out of international credit markets and challenged to pay debts to local creditors, plus repayments on a 2018 IMF loan.
Fitch Ratings’ July view on Argentina was “probable default” on its debt in the coming years irrespective of the 2023 election result, with a peso default also a real possibility. The Argentine authorities are making attempts to muddle through “but entail greater imbalances and liabilities that will compound future foreign exchange challenges”.
Asset sales in extended settlement could work
It would appear that once investors respect Argentina’s cash context, Burford equity is bound to drop again. But it did in early dealings yesterday, then recovered. Perhaps buyers are reckoning that negotiating a multi-year settlement horizon could include Argentina selling various YPF assets – for example with enhanced exploration rights – which say on a five-year view could offer a realistic way forward. Doubtless Burford will want to make intelligent proposals in a negotiation.
This would take the pressure off future IMF disbursements being seen as paying off litigation financiers, even though Burford couches its action and win in terms of helping Argentina return to the civil international community.
The financial aid context is the IMF last month disbursing around $7.5 billion to Argentina – bringing the total to around $36 billion. Interest payments to international governments alone are already over $14 billion a year.
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A settlement would still need approval by a new Argentine administration after the 22 October general and presidential elections, hence an additional element of uncertainty. Yet initial reactions by the Argentine media seem realistic, for example, noting that further appeals could cost over $1.5 billion in additional legal fees and interest.
If Argentina was always liable to ignore a legal verdict, then logically it would not have vested so much already in the process.
It is also quite a thorny branch for politicians to grasp ahead of the elections; a ticket of defiance more likely having to give way to acceptance.
Javier Milei, a Donald Trump-admiring nationalist, continues to lead polls – on a libertarian right-wing platform, offering a break with the left-wing Peronist culture affecting other parties. He espouses property rights, the rule of law and getting inflation under control by “dollarizing” the economy, which imply bringing Argentina in line with an international court verdict.
A 2% rise this morning to 1,325p
Scope for various outcomes of the YPF claims make it impossible to assert an intrinsic value for Burford. Yet the legal ratchet has clicked further towards a negotiated settlement, with asset sales potentially providing a way forward. I expect Burford then might sell the rights on, even at a further discount, so as to provide shareholders with certainty and re-invest.
I therefore regard the stock as a firm “hold” even speculative “buy” ahead of the second-quarter results – or on consideration thereof, early tomorrow. With higher interest rates liable to bear down on consumer and industrial companies reporting in months ahead, Burford offers relative resilience, and recessions usually bring a rise in litigation. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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