Burford income drops because of Covid-19 disruptions

Litigation funder Burford Capital (BUR) deployed more cash in the first half of the year than ever before but Covid-19 has clogged up the court system meaning its income was down. The tricky thing with litigation funders is that their income is lumpy and their accounting practices are often confusing. Burford is no exception.  

For Burford, the first half of this year was a perfect example of these issues. It swung from a profit before tax of $187m (£136m) in the first half of last year to a $67.5m loss this year. Income was down 68 per cent because 43 per cent of ongoing cases were delayed by Covid-19. Burford only gets its investment back when the cases they fund win, so Covid-19 clogging up court procedures is not good for its cash flow.

On top of the hit to losses, it also had to include some non-cash accruals in its operating expenses. This is because it reassessed the “actual and expected value of its portfolio”. In other words, some of the cases in the portfolio aren’t going to generate as much income as previously hoped for. These non-cash accruals came in at $78.9m. It’s tricky to account for the success or not of the cases it invests in, so these non-cash accruals are an expected hazard when looking at Burford.

However, Burford can point to its 95 per cent return on invested capital (ROIC) as evidence that it is quite good at picking winning cases. Its ROIC was pushed up this year thanks to a full $103m entitlement in the Akhmedov judgment -  which generated an ROIC of 233 per cent.

The company will be hoping that it can continue to generate the 95 per cent ROIC on the $503m group-wide capital commitments it made in the first half of the year. This was four times higher than the first half of last year. Commitments had slowed in 2020 because clients paused expensive legal procedures during the uncertainty of the pandemic, so an uptick is expected as people return to courtrooms to deal with pandemic delayed disputes.  

Brokers seem confident that its growing case portfolio will translate into profits. The FactSet broker consensus is that EPS will be 43.8p for the end of the year before jumping to 93.7p for FY22.

Forecasts dropped significantly since March this year, although analysts have historically missed by double digit percentages, so take them with a pinch of salt. Hold.

Last IC view: Hold, 599p, 24 March 2021