Gordon Stein, CFO of CleanTech Lithium, explains why CTL acquired the 23 Laguna Verde licenses. Watch the video here.
With the current share price still on the floor despite what seems best efforts on the part of Burford’s management and IR to reassure, it looks as though the only way to turn around the recent share price malaise is with cold, hard results.
These are hard to predict as Burford is generally a black box and generally refuses to given guidance given the nature of the business. However, I’ve spent some time doing some quick and dirty analysis of what those could be in the short term. For this it is useful to analyse the RNS which accompanied the FY19 results announcement on 28th April and gave a portfolio update for the first four months of 2020:
https://otp.tools.investis.com/clients/uk/burford_capital2/rns/regulatory-story.aspx?cid=1377&newsid=1388095
The first observations of this are that:
- The first four months of FY20 has been busier than FY19 in terms of adjudications
- ROIC on these results are a lot higher than the existing portfolio (closer to 200% vs 93% on the existing portfolio – which includes YPF partial sales)
- Settlements – which comprise c2/3’s of all deployment resolutions- aren’t mentioned
This bodes well.
Using these figures and the following assumptions I attempt to estimate 1H20 earnings (to be released in September – post the US-listing):
- The figures in the RNS are accurate – a reasonable assumption especially given the level of scrutiny now on them and given the jeopardy of US SEC regulations for inaccurate disclosures (assuming US listing is successful)
- BS income in final matters category gets 80% income recognition for the period
- BS income not in final matters gets 30% income recognition in the period
- BS losses at 2% of portfolio value
- Fair value gains already attributed to income are low as per the RNS
- Fund income as per the above in terms of income recognition but with 75% earning a performance fee of 25% on average attributable to Burford income
- Settlements are on top of these figures and resolve at the same historical rate of resolution from deployment (1.5 years) and with the same return profile (52% ROIC)
- The final two months of the half-year are half as busy as the first four months (i.e. 50% of the run rate) due to Covid-19 delaying legal processes
- Other income, operational expenses and finance expenses increase as per trend from FY18-19
With these assumptions I calculate earnings per share for the 1H20 to be around £1.12 for the half-year. Conservatively assuming the same lower-income run rate (50%) for the remainder of the year, that would meaning FY20 earnings of £1.71 or a forward PE of 3.43 against the current share price. Even with YPF binary-outcome risk for $773m on the current BS, that looks too low…
ffcmemebrer - I agree with everything you are saying. The point I'm making is around timing and remaining risk of YPF. If Burford wait, they might well get $6-9bn at trial or after appeal, but that will take 1-3 years and at present they risk Argentina being in default of their sovereign debt at that point, making recovery of that award much harder and longer (if delivered in full at all). Hence all the more reason to settle at a reasonable price now, and all the more reason for Argentina to settle whilst this is eventuality is on the table.
In addition, this is a very material case for Burford financially and would have a hugely positive impact on the business (and share price). Settling would dispel all the final issues surrounding the MW attack, provide huge amounts of cash to the BS (to redeploy in the current market rich environment), and underscore the firm's ability to deliver 30%+ IRR on invested cases. All these things could completely re-rate the share price to more like the 2-3x book value of the 2017-19 share price era. Therefore, if I were the board, I'd entertain a reasonable settlement today.
It looks very much like Argentina will lose at trial/appeal on YPF (and rightly so). Therefore if I were Argentina (which is going through a renegotiation of part of its sovereign debt), I’d want to use the possibility of defaulting on that debt as a negotiating point in my settlement on the case. I’d want the possibility of default to be on the table in the minds of Burford/Petersen/Eton Park as this will help Argentina get a better (lower) settlement given the possibility of a harder and longer recovery period for Burford and being mixed in with other bond claimants. Argentina and its people seem to have little appetite for another period of being shut out of international markets and both sides have moved considerably over the past few weeks. It looks like that will be settled in 1-3 months given the parties are edging closer (although currently apart and throwing toys out of prams in the press etc). It is better for Argentina to resolve both at the same time. Therefore it might be reasonable to assume pre-trial negotiations might be intensively ramping up prior to settling the bond renegotiation. Although I'm being highly speculative here, this could be what is behind the 1-week delay of last week. If we get another 1-2 week delay before this Friday which the plaintiffs support, further suspicion will grow that this is what is at hand. Of course, Burford know all this (and the merits of the case) and will have to weigh what they’d expect from a judgment + appeal process over 1-2 years plus pursute of claim vs cash and resolution certainty now. Oh to be a fly on the wall of those conversations!