The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
I agree it makes sense for the Argentinians to buy BUR. However it would not be politically acceptable in Argentina or almost any country. Politicians always choose the worst option as they are hostage to public opinion and they do not care enough.
I agree with you Forensic505 in the main. This is about fair value accounting which they are required to apply by accounting rules. Its the same for any investment bank / private equity. Nothing unusual there. If there is a write down we have not been deceived, that's just the way it goes. There is no cash effect, we are no worse off since we got no credit in the market ( probably has had a negative share price effect) for the asset on the balance sheet in the first place.
Also, management at Burford are smart, they are heavily personally invested in cash and reputation. The outside investors that bought the Peterson rights from Burford are smart, know what they are doing and have done due diligence. They know more than us about the YPF case.
It is what it is, we got no credit for it and we need to move on.
As an aside I think the Eton Park case part of the YPF assets are much lower risk as they do not have the Peterson / Eskenazi complications. The Eton Park case is much less likely to be lost on a technicality. This alone would pay for the $780 asset on the balance sheet. IMHO
As far as I understand, the YPF cases are held on the balance sheet as a $780 million asset. If they lose the case this will have to be written down. This would be a non cash write down but will obviously affect the net asset value per share. It would also create a lot of bad headlines even though it would be a non cash write down. I feel they will win the case on a matter of justice, its just that the risk is there that it may be thrown out on a technicality.
I have invested knowing this and still feel the company a great long term investment and very cheap. This compounding is evident in the total investment portfolio increasing 8% this year to $4.6 billion despite the COVID disaster. Also the cash generation this year at over $600 million is out of the park amazing. Bodes well for the future.
The closest comparable share that I come up with with regards to growing cash flow is Facebook. Absolutely printing cash. FB is probably a great investment going forward but the valuation is multiples of BUR and so lacks the extra margin of safety I crave.
Thanks for your opinion LN. In my search for companies with numbers as good as Burford, I simply come up blank. Sure there are software companies with growth rates above 30%. But that is usually revenue growth not NET PROFIT growth. They are often loss making or barely cash flow positive with huge stock dilution from share options. On top of that they trade at 10-30 x revenues. For my hard earned cash, they are a no go. I have a large BUR position and every month when I am looking to invest some cash I look at the market and it goes into BUR. Nothing else compares on cash flow, ROE etc. Gross and net margins beat even the best software companies. Add in BUR is not very cyclical and possibly counter-cyclical, that gives me a huge amount of comfort about my over sized position.
For the last 3 years BUR has generated around $500 million of cash annually. That is a 25% cash flow yield straight up. Take out the NAV and the annual yield is in the hundreds of percent.
Looking forward, Burford currently has a $4 billion investment portfolio (of which 65% is BUR balance sheet). They have consistently earned a 30% ROI over the years. Based on the 30% ROI, history would suggest that for the next few years BUR could generate cash flows of up to $1.2 billion annually. My best guess would be that cash flows will rise to $1.2 billion annually in a lumpy and non linear fashion over the next 3-4 years. 30% of $4 billion = $1.2 billion.
Add in the fact that BUR is reinvesting almost every cent of profit back into the investment portfolio annually; this gives me further reassurance that this level of cash flow is achievable. Compounding magic. 30-40% annual NET PROFIT GROWTH all be it in a lumpy manner seems the most likely outcome. Again I cannot find anything else on any market that compares especially given the fact we can buy BUR today barely above NAV. The business and future cashflows are essentially free.
Now of course there are many risks, most outlined in the financial reports, but to me the risks are below that of the average listed company specially compared to the risks in banks and other financials. Huge moat as industry leader in size and track record. Because of the lumpy nature of BUR results the share price volatility in BUR shares is likely to remain well above average. Big swings, up and down, are very likely to continue for the medium term. Do not use any leverage with BUR shares, a recipe for disaster. This volatility makes BUR unsuitable for a large portion of investors.
I cannot see why this not trade for minimum 20 x cash flow. For a leader in the industry with a huge runway ahead of it , 20x should be an absolute minimum. That gives an valuation today of at least $10 billion dollars or $50 per share. 2023 target $100 per share. These are not extreme valuations at all. My new personal obsession is accumulating as many bur shares that I can. Lol help
Every time I try to diversify my holdings away from Burford I cannot justify it. Nothing else compares, not even close. Burford is generating over $500 in cash every year. This is free cash to shareholders as it is barely trading above net asset value. Nothing else in the market I can find even approaches these kind of sustainable cash returns. I cannot justify putting my long term money anywhere else.
Solvency risks are negligible with extremely low debt to assets. Only real risks are regulatory and reputational. Yet these are risks all companies face especially financials. Why should I diversify and into what?
Confirmed with IR today. Burford will trade on London AIM from 8.00am Monday as normal. No anticipated or planned halts before New York open. Hopefully we can wave good bye to single digits for ever and look forward to triple digit share prices in USD.