A week of AIM drama as Burford sinks

After a week of high drama on AIM, Burford Capital shares remain significantly lower.

An extraordinary week for Burford Capital (LSE:BUR) has left one of AIM's biggest stocks trading at close to  half the level it was on Monday, despite a robust riposte to a short-seller attack.

The criticism from US firm Muddy Waters in a 25-page report caused shares in the business litigation funder to swing as much as 70% lower at one point on Wednesday. They recovered 26% yesterday after Burford published its response, with the stock up another 7% today following notifications that senior directors had been buying shares at prices as low as 655p.

Burford was trading above 1,800p earlier this year, with the £4 billion stock market valuation at that time rivalling Marks & Spencer (LSE:MKS) or Wood Group (LSE:WG.) in the FTSE 100 Index. Burford accounted for 7% of the AIM 100 Index at the end of July, having handsomely rewarded investors who got on board in 2009 when the stock floated at 100p in an IPO raising £80 million.

The stock is now back where it was in 2017, which analysts at Jefferies said in a note today made Burford look undervalued. They added that the company had answered the specific points raised in the Muddy Waters note on return calculations "comprehensively and convincingly".

Jefferies, which has a price target of 2,400p, said: "Recent events will have increased the cost of raising new capital and it is too early to assess any possible reputation damage to the operating business, but we think it remains robust.

"Our overall view of Burford is unchanged: it is pre-eminent in an attractive market with high returns and growth. It looks undervalued at this level."

As well as the share purchases by directors including CEO Christopher Bogart, the company said it was considering a share buyback to take advantage of the current price of the stock.

In the attack by Muddy Waters, the US firm outlined ways in which it believed Burford misrepresented its return on invested capital and its internal rate of return. It was critical of Burford's corporate governance and called it "a poor business masquerading as a great one".

Burford described the Muddy Waters report as "false and misleading", adding that "it is solvent, generates strong cash flow and has good access to expansion capital". The company said its accounts had been cleared by auditor Ernst & Young since 2010.

As Time Warner's former general counsel, Bogart founded Burford in the wake of its AOL merger, which had just produced the largest corporate contingency fee in history. The aim was for New York-based Burford to fill a gap in the market by providing capital to the legal sector so that commercial litigation cases can proceed.

In recent results, Bogart said Burford had enjoyed a "momentous" first half, with profits exceeding $200 million and assets surpassing $2 billion for the first time. Cumulative returns on core litigation investment portfolio increased to a 98% return on invested capital net of losses, up from 85% at the end of December.