Author Topic: BUR.L - Burford Capital  (Read 14438 times)

Normax59

  • Newbie
  • *
  • Posts: 15
Re: BUR.L - Burford Capital
« Reply #110 on: July 10, 2019, 03:35:08 PM »
If the figures I'm using are wrong feel free to correct me. Maybe I made a mistake somewhere. If you really think Jeffries stated what Petersen is on the books for can you show me a quote or something? It just contradicts what I know about fair value accounting so it's hard to believe as is. I can tell you how I looked at taxes but there's only so much we can read in book taxes, given the corporate structure. It looks like unrealized gains represents most of EBT in the last 3 years.

Just looking at the table on p.30 (2018 AR). Unrealized gains were 36% and 39% of investments in 2017 and 2018, respectively. That's $387m and $621m. That implies $234m of unrealized gains reported in 2018 revenue. That is pretty darn close to the calculated number for Petersen in 2018. If we repeat this for 2016 and 2017, we get $214m in unrealized gains reported as revenue in 2017. In 2016, unrealized gains represented $87m.

From the 2016 AR, Petersen was written up some, but no where near all the way to a $400m valuation. Perfect, we can see that. In 2017, BUR says they are aware of the $660m valuation trades but did not rely on them. If they went to $440m valuation at this point (the second direct sale at this price and conservative to secondary trading), that roughly fits what we measure (~$300m total unrealized gains + $106m proceeds on $440m valuation). If in 2018 they went to $800m (again, 3rd direct sale now and conservative to secondary trading), that again fits what we can calculate.

All of this fit the situation of negative book taxes with high reported income. Taxable income would be much lower with these unrealized gains. This all fits the cash flow statements. If there's issues with breaking out Petersen like this I'm open to hearing them but this seems all seems consistent with everything I've read from BUR. That means Petersen represents the majority of earnings between 2016-2018.

As to the quality of the business, I agree with you and others that it's a nice business. I may disagree on how to value it but it's a business I'd like to own. I like the trends in lit finance, I like that cash flows are generally uncorrelated, and so on. Packer brought up a great point about PFIC that I can't find a specific answer to, but it sure seems like it would be classified as such. I don't know much about all of that so that's a bit concerning. I don't know what I'd pay for BUR yet but I think it's worth getting comfortable with them since I would own them at some price.

So if you look at the Burford Capital Investment Data (as of December 2018) that was linked by Jerry Capital before, you can actually find the Petersen case. The Teinver case is 2010 Partially realized Single Case 111065 $13mm deployed $107 recovered. The Petersen case is 2015 partially Realized Portfolio 143539 Contract Energy NA $18.2 deployed, $136 Recovered. You could argue what's shown in the spread sheet is not what's used to calculate the revenue, it's possible.

On a negative note, I found several significant typos in the spreadsheet such as 2013 Concluded Portolio 178742 Antitrust Mixed NA $3.9 deployed $10.3 recovered, but the ROIC is shown as 346%. Also I couldn't get to the advertised 41% ROIC and 15% IRR (Page 21 2018 AR) for the period prior to 2016 if you write down everything ongoing (very aggressive assumption since ongoing deployed is 50% of the total deployed) to 0  from the numbers in the PDF file. However, I think what's shown in the PDF file is quite conservative.

It's explained in the document that it's not reconcilable to the annual report.


Normax59

  • Newbie
  • *
  • Posts: 15
Re: BUR.L - Burford Capital
« Reply #111 on: July 10, 2019, 04:16:50 PM »
My pleasure Schwab.

Curious, were you looking if there was potentially inconsistencies between the two? becuase the file they released this year has every case they have ever done.

Thanks

I would've checked for inconsistencies but I wouldn't have done it expecting to find any. After AZ_Value and VRX, I'm paranoid.


Assuming everything is fine as it has been, the main goal would be to recreate one year of revenue. With the 2017 table, we could track recoveries in 2018, movements from Ongoing -> Partially Realized or Concluded (and Partially Realized -> Concluded). We could look at all the tables BUR has provided to make guesses on various recognized balances. Depending how viable this idea was, we could even begin to make an estimate of how BUR estimates costs or what rulings led to what FV adjustment changes. That would probably take a lot of work and would probably be fruitless but anything to predict future PRs or financial results would be very valuable info.

BUR says we can't use this table to reconcile to the BS (which is fair) but it's a decent benchmark to figure out movements.

Outside of that, without knowing what the prior year looks like, I'm not sure what I'd find interesting so I'm not sure what I'd focus on. Maybe we could decipher what specific case some of these line items refer to and figure out how to search for these cases BUR is involved in preemptively in PACER. That might allow you to better predict future financial results or PRs. Maybe we can do this with a static look, I don't know.

Because they give the weighted average duration along with the IRR it's possible to reverse engineer what years the cash flows came in without reports from other years, though it would take quite a while to do each individual deal. Not sure if its even worth it though as you said.
« Last Edit: July 10, 2019, 04:19:38 PM by Normax59 »

peterHK

  • Full Member
  • ***
  • Posts: 177
Re: BUR.L - Burford Capital
« Reply #112 on: July 11, 2019, 06:14:18 AM »
Maybe I'm not paranoid enough, but it seems to me that this is best treated as an investment fund. One can't forensically audit absolutely everything, and IMO the time spent on doing such falls in the 80% of the work delivering 20% of the value.

Time is far better spent here looking at management and figuring out the character of who is running Burford at a variety of levels from compliance to the CEO/CFO/CIO levels.

Normax59

  • Newbie
  • *
  • Posts: 15
Re: BUR.L - Burford Capital
« Reply #113 on: July 11, 2019, 06:28:21 AM »
Maybe I'm not paranoid enough, but it seems to me that this is best treated as an investment fund. One can't forensically audit absolutely everything, and IMO the time spent on doing such falls in the 80% of the work delivering 20% of the value.

Time is far better spent here looking at management and figuring out the character of who is running Burford at a variety of levels from compliance to the CEO/CFO/CIO levels.

I'd rather just look at the numbers and figure out if they are accurate and represent the reality of the business, since they gave all the info that would be needed to track the cash flows from recoveries from the document, over not doing the work and crossing my fingers and hoping management is ethical.

Currently converting the PDF to excel and replicating the cash flows by year based on the IRR's and weighted duration's that they gave, I'll post it whenever its finished for those that would want to toy with it.

Jerry Capital

  • Full Member
  • ***
  • Posts: 103
Re: BUR.L - Burford Capital
« Reply #114 on: July 11, 2019, 07:12:23 AM »
FCF less than earnings is usually a bad thing.

"Low Quality Earnings"

If you understand the company and the flow of funds it makes perfect sense that cash doesn't track earnings. In fact they could juice near-term cash flow by selling all of Peterson (in which case FCF would be greater than NI), but they want to realize the higher cash payout I a few years down the road because they think it's worth more than the current secondary market.

I Beleive they would sell the entire case if the secondary market discounted at a 20 to 30% cost of capital, which is probabaly their hurdle rate...

This lowers the compounding effect and reduces the companies ability to gear its balance sheet.
Follow me on Twitter @JerryCap

Normax59

  • Newbie
  • *
  • Posts: 15
Re: BUR.L - Burford Capital
« Reply #115 on: July 11, 2019, 07:15:58 AM »
I don't know of any other company that operates in the FIG sector with 77% after tax margins, but maybe I'm not looking hard enough. The whole thing screams to good to be true.
« Last Edit: July 11, 2019, 07:21:10 AM by Normax59 »

Jerry Capital

  • Full Member
  • ***
  • Posts: 103
Re: BUR.L - Burford Capital
« Reply #116 on: July 11, 2019, 07:24:02 AM »
There is usually a lot of alpha in situations where you can't quite "box" it into a typical sector, industry, coverage list.

This is something new and evolving. If you are right and your implication is... This is a fraud? Or you are implying what they are doing is not sustainable? (don't want to put words in your mouth!

If you have more evidence than your hunch I would be interested.

For what it is worth I tend to have that same feeling, that it's "smelly".

I am pushing against that "intuition" because I think I can see downside protection not to far away, with a really great story.
Follow me on Twitter @JerryCap

Normax59

  • Newbie
  • *
  • Posts: 15
Re: BUR.L - Burford Capital
« Reply #117 on: July 11, 2019, 07:26:02 AM »
There is usually a lot of alpha in situations where you can't quite "box" it into a typical sector, industry, coverage list.

This is something new and evolving. If you are right and your implication is... This is a fraud? Or you are implying what they are doing is not sustainable? (don't want to put words in your mouth!

If you have more evidence than your hunch I would be interested.

For what it is worth I tend to have that same feeling, that it's "smelly".

I am pushing against that "intuition" because I think I can see downside protection not to far away, with a really great story.

I'm implying that its not sustainable. If I thought it was a fraud I would have said that and provided evidence, that is a big accusation to lob.
« Last Edit: July 11, 2019, 07:27:43 AM by Normax59 »

Jerry Capital

  • Full Member
  • ***
  • Posts: 103
Re: BUR.L - Burford Capital
« Reply #118 on: July 11, 2019, 07:33:43 AM »
Of course.

I just again, I don't want to put words in your mouth.

May I ask what specifically do you think is not sustainable here?
Follow me on Twitter @JerryCap

Schwab711

  • Hero Member
  • *****
  • Posts: 1539
Re: BUR.L - Burford Capital
« Reply #119 on: July 11, 2019, 07:49:36 AM »
Petersen.

This entire investment is Petersen, the current accounting of it and the frequency of cases of its magnitude. As BUR grows, they will soon need a Petersen every year to support the current valuation. If BUR grows larger based on speculated TAM, they'll need to average more than one Petersen a year.

If we assume Petersen is a one-off that cannot be repeated in magnitude then BUR's LT ROE probably maxes out at 15%-ish and true LT ROE is probably something less than 12%. That supports a much smaller P/BV than 3+.


Ex-Petersen, BUR's cumulative ROIC is ~1.6x on completions and ROIC has been falling over time. Obviously settlements have lower ROIC than trial cases, so near term should be lower. With that said, ex-Petersen, ROICs for 2015-2017 are 14%, 27%, and 26%. If that covers overhead (~8% annually at present) it's not by much considering the average life of a claim.

Two cases account for ~50% of cumulative recoveries for BUR. I get concerns about eliminating the best cases but it only points to the fact that we should expect lumpy financial results. The smooth 30% returns are not indicative of the future, even if you expect LT 30% ROE.

Edit: I think an unmentioned risk is future claims may have capped gains. If Petersen-like outcomes (relative and absolute return) are expected to be somewhat frequent then law firms or clients may argue that claims be capped at 10x return or so (as an arbitrary example). Outside negotiating leverage to extract a cap, various states are discussing regulating a cap on contingent returns as they consider litigation financing to be similar to payday loans.

See p.13/24
https://www.aciclaw.org/system/files/events/attachments/2017/2017-12-07_acic_presentation_litigation_finance.pdf

https://hireanesquire.com/blog/2018/8/27/legal-marketing-trend-litigation-portfolio-funding
« Last Edit: July 11, 2019, 08:00:37 AM by Schwab711 »