Last April I drew attention to Burford Capital (LSE:BUR) at 870p as a medium-term speculative “buy” on the rationale that litigation finance outcomes were looking up. There was the benefit not only of a backlog of court cases during two years of Covid being heard and settled, but also a major one with Argentina.
The 2015 “Petersen” claims were coming to a head after the 2012 nationalisation of Argentine oil company YPF had left a group of minority shareholders without compensation relative to majority shareholder Repsol of Spain suing Argentina in 2014 and obtaining a $5 billion payout. The Petersen group had bought 25% of YPF on the New York Stock Exchange, making the case relevant to international property rights and the status of NYSE-listed assets.
At end-March, a summary judgment by an international court – albeit Argentina would say in New York and with an American judge – declared a complete win against Argentina with respect to liability, albeit damages to be determined.
The stock rose 27% over 1,100p by late May then profit-takers took it back near 900p by mid-July. Lately, it has been on a tear again, currently 1,110p. Commercial updates have been strong, although key interest remains the Petersen outcome; where a 26 to 28 July trial court hearing in New York brought together the various parties. Post-hearing briefs were submitted by both sides earlier this month, with a final judgment awaited.
It keeps in focus Burford potentially receiving $5 billion to $15 billion versus a current market value of £2.4 billion or $3.0 billion equivalent.
Eyes are on progress with Argentina’s general election
A big hope for investors is the 22 October election (with a possible 19 November second round) triggering a re-set for Argentina, where it recognises the necessity of resolving Petersen, like it has other legal battles, or otherwise face mounting interest due on money owed.
In a primary election last Sunday, there was a huge shake-up. Voters punished the two main political parties, promoting Javier Milei, a libertarian outsider candidate, into first place with nearly 31% of the vote, versus the main conservative opposition on 28% and the ruling Peronist coalition on 27%.
Milei is a Donald Trump-admiring nationalist who promises a “break with the past” of poor governing, which is responsible, he says, for inflation at over 115% and a cost-of-living crisis leaving four in 10 people in poverty. What might this imply for the Petersen claims? That radical nationalism tempers once in power to sort the matter out and move on? Or that it takes a defiant line, part-symbolically, quite as Trump rode high on “America First”?
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While there was an aspect of protest vote to Sunday’s result, where voting in the primaries is obligatory for most adults, now that Milei is shown capable of winning, his strength might consolidate, even grow.
Paying the claims involves more public debt, where ironically Argentina has just borrowed $775 million from Qatar for a stop-gap repayment to the International Monetary Fund (IMF) despite its timetabling imminently to forward Argentina $7.5 billion. Quite whether that will be forthcoming, given that a radical nationalist is now lead candidate as president, but it has reached a stage anyway where it is more the IMF with a debt management problem than Argentina.
Argentina’s ratio of public debt to GDP is “only” expected around 73% at end-2023, compared with the UK’s over 100% currently and the US at near 123%. Yet there is a genuine debt service issue.
Might Argentina be compromised, realistically to pay (much of) the Petersen claims?
Last October, the Fitch agency added a minus sign to its CCC credit rating, citing “severe macroeconomic imbalances and limited external liquidity, which increasingly undermine repayment capacity as foreign currency debt service ramps up in the coming years”.
Fitch noted last June: “A default event of some sort appears probable in the coming years, regardless of upcoming elections...negotiating new external financing with the IMF will saddle the next government with even larger imbalances and socially painful policy trade-offs...”
That final aspect is pertinent now a “populist” presidential candidate leads the polls. Even if New York legal rulings continue comprehensively against Argentina, how realistic will it be to get financial settlement?
Burford equity may therefore remain volatile, especially if the next court verdict re-asserts value for its Petersen entitlements – much further rise, again being likely to see profit-taking.
Yet holders can take encouragement, a median scenario would be Argentina stringing out payments, with the not unreasonable excuse that it would otherwise risk social unrest. Burford might even opt to sell on its entitlement to remove uncertainty and gain a still substantial sum to re-deploy in attractive legal cases.
In terms of the risk/reward profile versus current share price levels, arguably it favours further medium-term upside – despite the volatility risk.
Underlying momentum looks strong, with scope to re-invest
Two years of court cases disrupted by Covid explain a volatile profits trend, where a slump from 2020 (see table) is expected this year to become $412 million (£425 million) net profit, for earnings per share (EPS) equivalent to 145p and a price/earnings (PE) multiple barely over seven times.
Burford Capital - financial summary
Year-end 31 Dec
|Turnover ($ 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||3,607||4,154|
|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|
Only a minor dividend is anticipated albeit 42p a share equivalent in respect of 2024 hence a circa 4% yield.
With the 2022 annual results last May, management contended that its portfolio “is at a turning point, with a potential increase in our realisation rate as more of our capital provision assets resolve. We expect to continue to see strong demand for our capital from tighter financial conditions and an unfolding economic downturn.”
A 13 June update then cited “extraordinary” first-quarter revenues. Capital provision income had more than doubled to $185 million like-for-like, with a six-fold increase in realised gains and a 41% advance in unrealised gains.
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Separately, fair value gains from the favourable judgment on the Petersen claims drove a 238% advance in their capital provision, near $500 million.
“As an indicator of ongoing portfolio activity, an additional 12 case milestones have occurred since the 16 May update noted 28 milestones and expected 61 more through the remainder of the year.”
The upshot was a 26 June update noting demand for Burford’s financing, outpacing the rate at which capital can be recycled from its concluded cases. Thus $400 million US debt was issued, maturing in 2031, while 6% bonds due 2024 were redeemed early given the lower cost of doing so given an increase in UK gilt yields.
This was after the 31 March balance sheet already showed $1.2 billion net debt. Despite higher interest rates, management contends that the use of debt optimises shareholder returns given this enables valuable legal cases to be backed and allowed to mature, [rather] than relying more on cash flows from cases concluded.
Short sellers have thrown in the towel
Various hedge funds jumped on the bandwagon after Muddy Waters Research declared Burford “arguably insolvent” four years ago. Having halved from over 1,500p, the stock fell below 400p in the early 2020 market sell-off and several hedge funds sold short 1% to 2% of Burford’s issued share capital. Yet the remaining two – Kuvari and Gladstone – had closed out by last April.
It further reflects a positive risk/reward profile, so long as you can tolerate this stock’s volatility; sometimes for no apparent reason.
Amid the ongoing risk of higher interest rates harming the economy, Burford is again of interest as a contra-cyclical play, able to benefit as litigation rises in a downturn, and in need of funding.
Interims are due on Wednesday 13 September and there is a case to buy once again, ahead of the results and final court verdict on YPF. That depends on your risk appetite where Argentina is concerned, thus overall I conclude: Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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