Courtesy of a poster on advfn this morning11 Sep 2019 13:02
Momentum Investor coverage from last issue:
Burford
808p Epic code: BUR
(Momentum Investor) The shares fell in response to a bear raid, driven by a report by hedge fund Muddy Waters which claimed there were issues with the quality of earnings, that it is insolvent and that corporate governance is poor.
In response Burford stated that it has provided audited and clean financial statements since 2010 and detailed investment level data on a cash basis using the same reporting approach. It went on to rebut the attacks on its accounting treatment of various investments.
It also stated that it has US$400m cash in hand, that its debt is “laddered” with maturities between 2022-2026; it has no intention of funding all undrawn investment commitments immediately; it expenses all costs rather than capitalise them and produces high operating margins of 84%.
Interestingly though, it then responded to attacks on its corporate governance by demoting the CFO, the wife of the CEO, who will become chief strategy officer and pledged to overhaul its Board with at least two new non-exec directors. It has also re-stated its desire to list on the Nasdaq or New York Stock Exchange before March or would list on London’s main market if that failed. Directors have also acquired over £3m of shares although they previously sold far in excess of that.
This short attack comes at a time when first half results showed pretax profit and eps rising 34% and 44% respectively, both new records with H1 eps of 100p exceeding Jefferies’ forecast of just 69p by a country mile. Last year’s full year results were only 77p. Crucially, its internal rate of return (IRR) remains high at 32%.
After the results Jefferies upgraded eps forecasts from 162 cents to 185 cents (152p) for 2019 although next year’s is reduced from 264 cents to 249 cents (204p), dropping the prospective PE to 5.3 and then 4.0.
It looks cheap but Jefferies notes it will now face an increased cost of raising new capital while there could be reputational damage, although it’s too early to say whether Muddy Water will stick.
Interestingly, Jefferies has maintained its £24 price target and while I don’t think it will get there any time soon, there should be a bounce from here when the dust settles. We are speculative buyers / strong holders.
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