Burford Capital Limited (LON:BUR) Fair Value

Burford Capital Limited (LON:BUR) is the global leader in litigation financing. The share price has increased around ten times in the past three years. Earnings are up almost five-fold from US$65.7 million in 2015 to US$317.6 million in 2018 while dividends per share have grown from 8c to 13c over the same period. Last year's result was driven by US$401 million in investment income which included US$230 million of fair value movements. Unlike equity fund managers, there are no market prices available to Burford to help it determine the movement in the value of its unsettled legal investments from one period to the next. Instead, it must use its own judgement.

The following is taken from Burford's 2018 Annual Report:

"In short, we hold litigation investments at invested cost until there is some objective event in the underlying litigation that would cause a change in value, whereupon we are required under IFRS to attempt to reflect the market impact (up or down) of that objective event. Our valuations have historically undershot our actual recoveries and that historical track record is one reason we see modest increases over time in the proportion of unrealised gain on our balance sheet."

I don't understand this. The case portfolio has grown from US$266 million in 2014 to US$1.6 billion last year. Generally speaking, the company is writing deals with a greater cumulative value each year. Revaluations are booked upon an objective event which is more likely to happen closer to settlement. Based on this I would have expected that the percentage of investment value made up of unrealised gains would fall in a period where Burford is putting rapidly increasing sums of capital to work each year.

Burford trades on a forward price-to-earnings ratio of 12 which seems low for a stock with such a prodigious performance track record. It is also priced at 3.2 times book value, almost half of which is unrealised gains.

Comments

  1. Matt, brutal day for BUR - more MTM shenanigans - your cost:unrealised split above illustrates it.
    Similar in Australia with RFF.

    ReplyDelete
  2. wow, I completely missed that BUR blow up thanks for the head up. Haven't been following RFF either, but need to make time to read the short cases for both.

    ReplyDelete

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