- Income from operations drops by $230mn
- Funder commits over $1bn to new cases
The word “timing” appears more than 30 times in Burford Capital’s (BUR) annual report. The litigation funder attributes its first pre-tax loss of almost $60mn to the “vagaries of the litigation process” and a series of court delays. Burford’s chairman thus concludes that the loss is not a “matter of substance”.
Timing is far from insignificant in the world of litigation funding, however, where companies back legal claims and take a share of the winnings if they succeed. Cash flow is crucial to consistent returns, and Burford’s is notoriously lumpy.
2021 was no exception. The group reported a cash outflow from operating activities of $585mn (£445mn) last year, compared to a cash inflow of $54mn in 2020. This was attributed to heavier investment in legal cases and a “quiet” period for realisations.
The unpredictable and lengthy nature of litigation is also beginning to translate into headline losses. Burford said it has seen delays in many of its matters, made worse by Covid-related hold ups. The ‘weighted average life’ of its legal finance assets - a metric which measures the length of time from deployment to cash realisation - now stands at 2.3 years, up from 1.6 years in 2017.
Burford’s capricious cash flow, combined with the unpredictability of litigation, means it is hard for investors to assess the group’s potential. Indeed, analysts at Peel Hunt say that, despite being listed for more than a decade, “there are still big question marks as to how profitable Burford actually is”.
It’s not all bad news. Burford has deployed a record amount of capital from its balance sheet into assets, which could promise high returns in the future. And the group does seem to have a knack of picking the right cases: management points to a 93 per cent return on invested capital figure relating to concluded assets.
There’s also the fact that Burford’s returns are not related to market conditions or economic activity, but judicial decisions. Rising interest rates and economic volatility shouldn’t have a major impact on business, therefore.
Developments in the industry as a whole may also go some way to de-risk Burford’s business model. While funders have traditionally invested in very high value legal claims which promise large returns - such as class actions against major corporations - companies are now eyeing lower risk, lower value claims.
Earlier this month, for instance, Burford raised $360mn to invest in lower value cases promising an internal rate of return of between 12 and 20 per cent, compared with a group average of 30 per cent.
Litigation funding is still a nascent industry and opportunities abound. Risks, however, are also plentiful, and these figures will doubtless raise the spectre of earlier criticism from US short-seller Muddy Waters over Burford's accounting treatment. Hold.
Last IC View: Hold, 821p, 9 Sep 2021
| BURFORD (BUR) | ||||
| ORD PRICE: | 741p | MARKET VALUE: | £ 2bn | |
| TOUCH: | 740-742p | 12-MONTH HIGH: | 970p | LOW: 576p |
| DIVIDEND YIELD: | 1.3% | PE RATIO: | NA | |
| NET ASSET VALUE: | 886¢ | NET DEBT: | 65% | |
| Year to 31 Dec | Turnover ($mn) | Pre-tax profit ($mn) | Earnings per share (¢) | Dividend per share (¢) |
| 2017 | 343 | 265 | 120 | 11.0 |
| 2018 | 425 | 305 | 151 | 12.5 |
| 2019 | 366 | 226 | 97.0 | 4.17 |
| 2020 | 359 | 210 | 75.0 | 12.5 |
| 2021 | 152 | -59.4 | -33.0 | 12.5 |
| % change | -58 | - | - | - |
| Ex-div: | 26 May | |||
| Payment: | 17 Jun |
