Investment Ideas 

Burford is a winner

BUY

IC Tip: Buy at 121p

Tip style
Growth
Risk rating
Medium
Timescale
Long Term

Bull points

  • Attractive yield
  • Impressive track record
  • Diversified revenue stream
  • Strong investment return

Bear points

  • No certainty of winning legal cases
  • Revenue stream rather lumpy

Burford Capital (BUR) provides finance for companies with a civil litigation case that they are unable or unwilling to pursue themselves - usually because of the time involved and the cost. Burford then takes a cut of the amount awarded in the case of a successful conclusion, which funds tasty dividend payments. And by and large, Burford has backed winners all the way.

For investors, the problem is that legal cases don't really allow any chance of building a regular income stream. So revenue, and consequently dividend payments, tend to be rather lumpy. However, Burford's investment portfolio is getting a lot closer to maturity. All the investments made in 2009, for example, have now been resolved, delivering a 33 per cent rate of return. But around half the investments made in the following two years have yet to reach a conclusion, and only a third of investments made in 2012 have been concluded.

Burford has attracted criticism in the past for its relatively high cost base and control over the executives. Both have been addressed; costs fell 10 per cent last year, and, following a restructuring, the chief executive and chief investment officer can no longer receive external advisory, management or performance fees from the company. Nor can they advise other funds, making them reliant on dividends and share price appreciation for returns.

BURFORD CAPITAL (BUR)
ORD PRICE:121pMARKET VALUE:£247m
TOUCH:118-123p12-MONTHHIGH:147pLOW: 106p
FWD DIVIDEND YIELD:4.9%FWD PE RATIO:8
DISCOUNT TO FWD NAV:-1.7%NET CASH:$58m

Year to 31 DecNet asset value (¢)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
201117215.98.84
201216234.017.05
201317242.520.05
2014*18649.422.09
2015*20356.826.010
% change+9+15+18+11

Normal market size: 2,000

Market makers: 8

Beta: 0.12

*RBC Capital Market estimates Profit and earnings figures adjusted £1=$1.7

Burford has also broadened its revenue stream. Case details are usually withheld under the terms of agreements with its counterparties, but one case was revealed because its client, power generator Rurelec, had certain disclosure obligations, and gave its consent to reveal the details. Rurelec was pursuing an arbitration claim against the Bolivian authorities for the expropriation of one of Rurelec's power plants. The company did not need litigation finance, but found it near to impossible to secure a loan at an acceptable rate to expand the company. At this point, Burford stepped in with a $15m (£8.8m) senior loan at 12 per cent and a claim on some of the arbitration award. Following a successful resolution, Burford received back $26m, generating a 73 per cent rate of return.

At the end of 2013, Burford had $264m of ongoing investments. This investment portfolio deals with US litigation, but Burford also made an entry into the UK two years ago though the acquisition of Firstassist, now called Burford UK, a provider of after-the-event litigation insurance. This is where the defendant of a case buys insurance that will pay the expenses if the case is lost. It also gives Burford access to a successful underwriting division, and last year, Burford UK delivered a record profit of over $10m on $20m of revenue. In fact, over $150m of new business exposure was written last year, more than all of the two previous years combined.

IC View

Investing in Burford is really a play on the company's ability to see its clients win their cases, and so far it has been highly successful. Since inception, 25 investments have generated $147m in gross investment recoveries, producing a 52 per cent net return on invested capital. This in no way means that the rate of success will continue, but Burford's careful selection suggests that there is a good chance it will. For income-seekers, the payout can be a bit lumpy as there is no way of telling how long a case may take to complete, but with a forward dividend yield of nearly 5 per cent and the shares trading more or less level with forecast 2015 book value, the investment case is compelling. Buy.

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