Corporate clients already quarrels about contracts. Many don't want to stick to their contracts or default on their terms. I would think that there are quite a lot of issues that will need to be settled in court. I don't have a specific idea on how it will impact the BUR portfolio, but I would not be surprised if we see an overall spike in litigation going forward.
Initially it was meant to be a Brexit play. As it turns out, it may prove a nice play on the current situation as well.
I'd hold indeed.
Berenberg estimated the NAV (or intrinsic) value at 616p, suggesting a price target of 810p with a rating of Buy.
https://www.lse.co.uk/news/berenberg-upgrades-burford-capital-to-buy-cvheks3fehuizl8.html
That figure used rather pessimistic assumptions too. Positively surprised that their figure of 616p is not too far off from my estimate of 613p as discussed earlier.
Shows the usefulness of Ben Graham's formula.
Moodys rates their financial outlook rather strongly.
"Burford maintains a strong capital position to buffer asset and earnings volatility that stems from its litigationinvestments. The company's ratio of tangible common equity to tangible managed assets was 60% at 30 June2019, well above the average for other specialty finance subsectors. By maintaining high cash balances,employing low leverage and effectively laddering debt maturities, Burford also maintains a strong liquidityprofile."
https://www.burfordcapital.com/media/1658/moodys-30-october-2019.pdf
Provided one can trust Moodys (one usually can), then the company has no liquidity issues. Results are expected to fall in line with their recent trading update.
https://otp.tools.investis.com/clients/uk/burford_capital2/rns/regulatory-story.aspx?cid=1377&newsid=1362341
Cheers Littlepost.
If you prefer videos, I recommend
https://www.youtube.com/watch?v=npoyc_X5zO8
and
https://www.youtube.com/watch?v=vFrgdvFKGVU
naturally, reading the books is also a very good idea.
No problem. It's fair comment and no criticism.
The 'Graham formula' I employed, was from his teacher at Columbia. There is a lot more work to be done rather than looking at simple valuation ratios indeed.
If one cannot understand what's going on then one should give it a pass. That's very good advice.
I am not here to tutor about the basics of value investing, but wanted to steer the conversation more onto business fundamentals and actually what the company does rather than 'I think the share price is going to go up today', 'why has the share price not gone up', 'i think the full moon will impact earnings soon' etc...
There is a reason why I pointed to a link helping people understand what the accounts can be like. It is important to be in a business for the right reason, not for the 'bigger fool theory'. It is up to each individual and then decide.
All this was to help you make a decision instead of feeling pain because of market sentiment.
Whatever view you take, I'll be fine with that.
Possibly. There is a huge reliance on bonds for financing a rather aggressive expansion strategy.
This and the delayed results would signal a clear 'underweight'.
I could be wrong though, but I'd consider these facts.
Possibly. There is a huge reliance on bonds for financing a rather aggressive expansion strategy.
This and the delayed results would signal a clear 'underweight'.
I could be wrong though, but I'd consider these facts.
ronmcdonald. I fully understand your skepticism and would like to thank you for it.
I am not sure how interested you are in this company, but here is a very good paper that explains why financial service companies need to be valuated through a different lens. It argues these are best valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends, rather than free cash flow to equity.
http://people.stern.nyu.edu/adamodar/pdfiles/papers/finfirm09.pdf
Here is an albeit old analysis on Burford, which is still highly relevant today (and free). Hope you (and others) find it interesting. I am sure many have already seen this.
https://kitchensinkinvestor.wordpress.com/more/articles/articles-2014/2014-u-k-companies/burford-capital-a-complicated-uk-smallcap/
Stay safe
Hi
I am increasingly interested in this business. But what is it's intrinsic value? Without digging further into the accounts I can run the Graham formula for this security with the following assumptions. A mere growth rate of 2.3% (cash flow growth), and a 20yr Bond rate of 4.60%.
This gives it a fair value (intrinsic value) of 52.65p. Applying a margin of safety of 50% makes this a buy under 25.83p.
Arguably, one can pick a much higher growth rate but consensus is low going forward. History is a bit 'lumpy' but it looks like one gets a rather good discount. Or is there something that eludes me?
How did you value this security? Do you agree with the growth rate assumptions or is there something I missed?
Yuri.F, intrinsic (fair) value always applies. Why would market movements suddenly alter the fundamentals?
As stated before, the minimum time horizon suggested is 3 years. I would expect to have some indication as to the accuracy of my estimates by then.
Littlepost, my calculations where using very depressed assumptions about this stock. Going with normal values, ie a slightly higher growth rate, 3.7%, (theirs is nearly 30% now -- but I don't think this is sustainable) and EPS as TTM (not 2018), then it is a flat out buy anywhere below 900p with a 50% margin of safety.
Fair value calculations are never that precise. But it's good to know the upper and the lower range.
Bear in mind that a positon in Burford is an enterprising one and not a defensive (as had been correctly pointed out). Which is why I used a rather low figure for it's growth rate. Some indicators suggest a much higher growth rate in the range of 12-17%. This together with a margin of safety make for a rather conservative fair value estimate.
This may not manifest itself rapidly (although it could). Sometimes it takes a bit of time for things to work out and be priced correctly. I have this time-frame at 3 years minimum.
In the meantime, if you are confident it is still a great business and Carson was wrong, enjoy the discount at which it trades.
Hope this helps.
ronmcdonald, if you are familiar with the work of Graham and Dodd (Security Analysis, 2nd ed) you will find it not unusual to adjust reported earnings and cash to reflect a clearer picture (see their excellent treatise on intangible assets).
Of course, one should not massage the free cash flow in order to make it fit gross assumptions, that would not be beneficial to the investor indeed.
You can see it on how their cash position grows on the bottom-line. My assumption of a 3% growth rate (their cash grows at 29.7% 5yr CAGR) rather conservative in my assumptions on calculating the intrinsic value.
There are many other methods to do this sort of estimation. But I got fed up with loads of arbitrary quotes flying about without any justification whatsoever.
I read the MW report before taking a position, and my conclusion was the Carson mis-understood the business and how it accounts for it's earnings. Taking the Woodford scandal into account it was not difficult to see why it suddenly appeared on his radar (everyone on the short side knows that his liquidity problems will force a sale and depress the share price -- no matter what). Are you sure that Carson didn't massage the picture to suit his needs (ie a justification to short the stock)? He doesn't even hold a meaningful short position any longer (if it's really that horribly corrupt and broken, why cover your short so quickly?). There is also the question of Manolete (MANO) -- which uses the precise same accounting (and unsurprisingly sports similar FCF figures). Why didn't MW short them as well? Not in the Woodford portfolio. That was my conclusion.
I could be very wrong. Time will tell (3 years).
I prefer to invest like a business owner.
Knowing the value (range) of a security helps enormously when the market hasn't priced the company correctly (happens ALL the time).
I had many positions being down 40% only to sell them 10 years later at 300% profit. Such is the market and people's irrationality (which knows no bounds).
Rationally, you would want the price of an excellent security to remain as low as possible for as long as possible. If I'd offer you to purchase £1.00 for £2.00 you would (hopefully) decline. But if I'd offer you to purchase £1.00 for £0.50 you would definitively agree.
Why should it be any other with securities?
"The stock market is the only market where participants complain as the prices go down".
Let that sink in...
PS: As prices increase so does risk.
Who would not want to follow Warren Buffet's model?
But you are unfortunately wrong. Every business has an intrinsic value. Let's use a different term then. How about fair value? It's the same.
If one isn't able to establish the fair value then investing becomes gross speculation at best.
The intellectual framework was laid out by Benjamin Graham quite a while ago. And yes, a company like Burford easily passes his enterprising investor screen. It is not a defensive investment though, since---as you pointed out correctly---the financial history isn't long enough. Add a little Phillip Fisher here? Do I sound like Charlie Munger now? Probably.
So let's use Graham's formula to value the company (I use the adjusted form), you can look it up here Https://www.oldschoolvalue.com/stock-valuation/benjamin-graham-formula/
My assumption are a t 4.60% 20YR bond yield and that the business grows at 3.0% (a sensible value for projecting way into the future --- the company won't continue to grow at current rates, if it does, then we certainly won't mind the surprise).
This gives it a fair (or intrinsic) value of 1224p (does this figure look familiar?). Applying a margin of safety of 50% the company is a buy under 613p.
Not sure why people thought they would get a good deal when buying this security at much higher prices, way above its value and without any room for error, but such are the perils of not estimating the value of an asset prudently and with a margin for error.
I am not the slightest bothered when it trades below that level. The only thing I would regret is that this window of opportunity suddenly closes, either via a huge run on the shares (once the market recognizes the BS in the MW report) or via a *gasp* MBO (which is the least favorable outcome here).
Hope this helps.
Since the company now clearly trades below its intrinsic value, it would actually make sense to repurchase shares. However, as a young company the board prefers to fund further claims and thus increase their market share---which is correct.
An MBO would rob us of the opportunity in the ownership of a great business. I would not want to contemplate such event. I am happy with the company trading below intrinsic value for quite some time.
For the impatient
Https://www.youtube.com/watch?v=npoyc_X5zO8
After 30 years in the game, I am still baffled at speculators (because that's what most people here are) getting spooked by market movements (ie opinion).
There is an underlying, central (or intrinsic) value that each company has. I'd recommend to focus on that (you need to do your own estimates). Without any ballpark as to this value, price movements can be indeed unnerving and cause many people to buy high and sell low.
I do not know what the stock market will be doing over the next 2-3 years. In fact, I am not that bothered either. But I know that my positions have good earning power and that each of them has a distinct competitive advantage in their field. Burford has an incredible success rate. Last time I looked it was 99% -- which by their own admission is extraordinary. The market didn't price this news at all (but the long term effect of this will make itself visible on the balance sheet over time). As far as litigation finance is concerned, they lead the pack. But litigation finance attracts a lot of enemies. I don't think you make it onto someone's Christmas-card list by impounding their possessions or enforcing payments of past judgment that many tried to evade. It is bound to be contemptuous and many will continue to criticize their activities publicly or even go as far as to attempt and undermine Burfords ability to finance further activities.
Note that Burford also has a litigation insurance business in addition to financing claims. The portfolio holds 1,100 claims. What's there not to like?
I'd rather the BOD concentrates on running their business rather than divert resources to mitigate market speculation. I see a lot more value in that.
Of course, I'd prefer the SP to be a lot higher, but on a 10-15 year time-frame, unless something drastically changes in the business, I am happy to have a share in a business with good earnings power.
Setbacks happen, but their business is not broken. That's what matters. Eventually the market will price this company correctly. I would expect a 2-3 year time-frame for this.
In the meantime, I enjoy the discount on these earnings. In fact, I would prefer the price to remain low for as long as possible.