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OPINION

Brexit winners

Brexit winners
August 1, 2016
Brexit winners

The company is the world's largest provider of investment capital and professional services for litigation cases to lawyers and clients engaged in major litigation and arbitration. It has been doing rather well, so much so that the shares have risen by 167 per cent since I first recommended buying them last summer at 146p ('Legal eagles', 8 Jun 2015), and have soared by a further 25 per cent since I reiterated that advice at 310p a little over a month ago ('Brexit: reality check', 28 Jun 2016). The board has also paid out total dividends of 4.5p a share.

The headline numbers were truly eye-catching: litigation investment income more than doubled to $64m (£48.8m) in the six months to end June 2016, driving up total income by 88 per cent to $76.2m; pre-tax profit surged by 135 per cent to $55.8m; and the company generated almost $100m of cash from its operations, including $84m from litigation finance, highlighting the hugely cash-generative nature of its business. Moreover, having raised £100m from an eight-year London Stock Exchange listed retail bond offering a 6.125 per cent yield in April 2016, the company has been actively recycling its cash into new cases and made commitments of $193m in new cases in the first half. The balance sheet is by no means stretched as Burford still has cash balances and money market deposits of $207m available to support new investments and the $251m debt outstanding from its two retail bond issues mature in 2022 and 2024, long after the current investments being made will be settled.

The company is an obvious Brexit winner, a point I made in my June article. That's because 94 per cent of balance sheet assets are denominated in US dollars, so the company is benefiting from the devaluation of sterling; the business incurs significant expenses in sterling which now cost less and earns most of income in US dollars which is worth more; the aforementioned loan capital is denominated in sterling, but was converted into US dollar deposits at an average exchange rate of $1.547, or 18 per cent above the current cross rate, which has reduced the repayment cost by $38m; and the US dollar dividends are worth more in sterling to UK shareholders.

 

Brexit uncertainty offers opportunities

Burford is also likely to benefit from the uncertainty caused by the recent EU referendum. That's because demand for legal services tends to boom during periods of uncertainty, and there is likely to be more litigation as a result of Brexit, which can only boost the case volumes. There is also no negative impact on any pending or future litigation from the UK's potential or actual exit from the EU except for added complexity around enforcing English court judgments in Europe, although such issues are likely to be resolved through negotiation and if not they will prove a boon for the company's judgment enforcement business. Another positive is that the decline in the value of sterling makes UK courts and arbitral institutions (and the UK lawyers who practice in them) more economically competitive globally, which can only be good for Burford's business.

For good measure the shares have a beta close to zero, a fact worth noting when markets are as volatile as they have been. So, with so many tailwinds driving the business, it's hardly surprising that the shares have proved attractive for investors in these uncertain times. Analysts have reacted positively too: Trevor Griffiths at brokerage N+1 Singer has raised his EPS estimates by a third to 34.7¢ for the full year, and lifted his 2017 forecast by 11 per cent to 40.2¢. On this basis, Burford's shares are trading on less than 13 times next year's likely earnings and, assuming the full-year dividend is hiked by almost a fifth to 9.5¢ this year, rising to 11¢ in 2017, the prospective dividend yields are respectable enough at 1.8 per cent and 2.1 per cent, respectively.

In my view, Burford's shrewd legal eagles are still worth backing. Not only is the earnings risk skewed to the upside - almost three-quarters of this year's earnings estimates have already been booked in the first half - but there is no technical resistance to hinder progress as the shares are now in blue-sky territory. Buy.

 

Exploit Juridica's pricing anomaly

The same advice applies to the shares of Juridica (JIL:61p), an Aim-traded company specialising in backing corporate legal cases in North America with its own capital in return for taking a share of the financial awards in the event of a positive outcome. The board has been winding down its portfolio of litigation cases and returning chunks of cash to shareholders.

I included the shares in my 2016 Bargain Shares portfolio at 41.2p and the company subsequently paid out a dividend of 8p a share in late June. If you bought on that recommendation, or for that matter after any of my subsequent articles ('Bargain Shares pricing anomalies, 4 Jul 2016), I would advise that you use the dividend to buy more shares ahead of the forthcoming half-year results in September.

The shares are now tantalisingly close to signalling a major share breakout on a move above 62p, the catalyst for which is likely to be news of another payout and one that will be boosted by sterling's 13 per cent plunge against the US dollar in the past five weeks. I have good reason to think this way because, following settlement of two major litigation cases in Juridica's favour, the company will receive cash proceeds of $65.8m (£50m) by the end of next month, a significant amount in relation to their $55m carrying value. Cash from these cases equates to 44.5p a share, and I reckon they will boost the cash balance to 58.5p a share. This means that you are getting a completely free carry on Juridica's other 13 legal cases, which have a book value in its accounts of $35.4m, or 24.5p a share.

So, even though the holding has already generated a total return of 61 per cent in the past six months, it doesn't take a genius to work out that the equity is being undervalued at the current price. Ahead of the forthcoming half-year results, and with the board committed to distribute funds back to shareholders, I rate the shares a buy.

 

Minds + Machines on a roll

Another beneficiary of sterling's plunge is Minds + Machines (MMX:10p), a company that provides services in all areas of the domain name industry and is primarily focused on the new top-level domain (gTLD) space. It has clearly been benefiting from earning income in US dollars, its functional currency, so sterling's weakness has lifted the value of its overseas earnings. And because 90 per cent of assets and cash deposits are US dollar-denominated, I reckon the company currently has a spot net asset value per share of 8p, including cash deposits of 3.4p and a portfolio of domain names worth 4.2p. That's 14 per cent higher than before the EU referendum.

Operationally, the company is making significant progress. A pre-close trading update ahead of interim results on 20 September could not have been more positive. Billings in the six-month period more than quadrupled to $8.05m, and exceeded that for the whole of 2015; domains under management have surged by more than 500,000 to 728,940 since the start of this year; and operating expenses have been "significantly reduced as a result of decisive cost cutting and restructuring by the new management team".

Chief executive Toby Hall is upbeat, pointing out that "we are seeing exceptional growth in the new gTLD market. The new management team's dual-track strategy of launching our portfolio into those markets experiencing greatest growth while streamlining the company into a pure-play registry is already paying dividends. We have every reason for optimism and excitement as we rapidly transition from historic operating losses to operational profitability in this fast-growing industry".

The insiders clearly believe the shares should be trading on a decent premium to book value as they have been heavily buying all this year. The shares are up 25 per cent since I included them in this year's Bargain Shares portfolio, and I continue to rate them a buy at 10p. Buy.

 

Cleaning up

Maiden full-year results from Accrol (ACRL:118p), the recently listed Aim-traded Blackburn-based maker of toilet rolls, kitchen rolls and facial tissues, highlighted ongoing strong sales growth from the discount retail segment, where it has a 35 per cent market share.

All the evidence suggests that a move towards the non-discretionary economy and private-label products accelerates in periods of weaker consumer confidence, as is the case right now, so I firmly expect Accrol to be a major beneficiary in the post-EU-referendum environment. It has been performing well in any case, which is why I recommended buying the shares when they floated at 100p in early June ('Clean up with Accrol', 6 Jun 2016).

The maiden results have done nothing to alter my stance. Underlying sales rose by 17 per cent to £118m in the 12-month period, slightly ahead of the three-year compound annual growth average, to generate cash profits of £15m and EPS of almost 9p. Expect another year of similar sales growth to drive up cash profits by around 10 per cent and lift EPS to 11.5p, a performance that will easily underpin a 6p-a-share dividend as the board has indicated.

On a forward PE ratio of 10, and offering a prospective dividend yield of 5 per cent, I continue to rate Accrol's shares a buy.

 

Trifast for more gains

Trifast (TRI: 135p), a small-cap manufacturer and distributor of industrial fastenings, has delivered a positive trading update, its first since the EU referendum.

At the annual meeting, chairman Malcolm Diamond pointed out that since the company's full-year results in mid-June "trading across all regions has remained in line with expectations and is on track with our organic growth performance and capital investment objectives for the current year". He also added that "our optimism continues to be undiminished by the ongoing negative macroeconomic media preoccupation".

Analysts have held their forecasts that point towards mid-single-digit earnings growth to around 10.4p a share, but stress that favourable currency tailwinds and Trifast's tendency to consistently deliver expectations are both highly supportive of the investment case. Also, the company has been targeting growth industries and sectors - automotive and domestic appliance markets, primarily - and continues to generate ongoing benefits from the 2014 acquisition of VIC, an Italian maker and distributor of fastening systems predominantly for the white goods industry. That acquisition trebled Trifast's exposure to domestic appliances to almost a quarter of its sales. With the benefit of a lowly geared balance sheet I wouldn't rule out the possibility of further earnings-accretive bolt-on deals.

So, given Trifast's significant overseas sales exposure, and likelihood of further sterling weakness in the coming months, both of which will have a positive translation effect on profits, I feel the earnings risk remains to the upside. Having included the shares in my 2013 Bargain Shares portfolio at 53p, since when the company has paid out 5.1p a share in dividends with a final payout of 2p a share payable in mid-October (ex-dividend date of 15 September), and last recommended running profits at 137.5p ('Enlightening calls', 15 Jun 2016), I maintain that advice. Run your 155 per cent profit.