Author Topic: BUR.L - Burford Capital  (Read 46626 times)

Schwab711

  • Hero Member
  • *****
  • Posts: 1635
Re: BUR.L - Burford Capital
« Reply #150 on: July 16, 2019, 01:49:35 PM »
I meant VRX in the sense that no matter how times it was written that inconsistent numbers, misleading narratives, ect are not a good sign, there was always an excuse for the inconsistencies to explain why it was fine. I didn't mean to say that BUR is VRX (or that it is a fraud or anything like that). The investment thesis seems as unbreakable as VRX's was from my point-of-view (which was correct in the case of UBNT and I was wrong on the importance of the issues I saw).

I guess to change gears, how are folks valuing BUR? What's the thesis that doesn't rely on P/E multiple? Has anyone taken a stab at a DCF?


Normax59

  • Jr. Member
  • **
  • Posts: 50
Re: BUR.L - Burford Capital
« Reply #151 on: July 16, 2019, 02:18:36 PM »
I meant VRX in the sense that no matter how times it was written that inconsistent numbers, misleading narratives, ect are not a good sign, there was always an excuse for the inconsistencies to explain why it was fine. I didn't mean to say that BUR is VRX (or that it is a fraud or anything like that). The investment thesis seems as unbreakable as VRX's was from my point-of-view (which was correct in the case of UBNT and I was wrong on the importance of the issues I saw).

I guess to change gears, how are folks valuing BUR? What's the thesis that doesn't rely on P/E multiple? Has anyone taken a stab at a DCF?

Not really sure how we would find FCF given their cash flow statement. IMF has their own FCF calculation in their annual report that could be applied though.

Net Profit After Tax
+ Litigation Contract Expenses (would need to determine the equivalent for BUR)
+ Depreciation
+ Change in WC
+ Net Investments (New investments - receipts)
- Capex
= Free cash flow

Jerry Capital

  • Full Member
  • ***
  • Posts: 108
Re: BUR.L - Burford Capital
« Reply #152 on: July 16, 2019, 02:31:25 PM »
You can't think of it like that.

You have to be more creative.
Follow me on Twitter @JerryCap

Schwab711

  • Hero Member
  • *****
  • Posts: 1635
Re: BUR.L - Burford Capital
« Reply #153 on: July 16, 2019, 02:44:17 PM »
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

Jerry Capital

  • Full Member
  • ***
  • Posts: 108
Re: BUR.L - Burford Capital
« Reply #154 on: July 16, 2019, 02:53:06 PM »
It's not cryptic.

I don't have a formula or calculation.

It's more about looking out a long time horizon, and thinking, can they take what might have been a lucky win with Peterson and build some sort of moat, shift to a more recurring revenue model with an asset management arm and portfolio financing.

The multiple that a truly uncorrelated (not negative but zero correlation) equity with stable earnings would be incredibly high (think $V $MA type mutliple)...

You have decent downside protection IMO and a very interesting bull case.

It's more of a Bill Miller style investment for me, and that is reflected in the weighting in my portfolio.

Does that make sense?
Follow me on Twitter @JerryCap

Normax59

  • Jr. Member
  • **
  • Posts: 50
Re: BUR.L - Burford Capital
« Reply #155 on: July 16, 2019, 03:27:43 PM »
Here's as creative as I can get:

2018

Net Profit before Tax: 305,114
+Adjustments For Non-Cash: 16,709
+Proceeds from Investments: 629,410
-Funding of Investments: 738,243
+Proceeds from new initiative investments: 8,757
- Funding of new initiative investments: 33,074
+ Proceeds from Financial Liabilities: 74,044
-Due from brokers and due to brokers: 75,566
- Change in Operating WC: 3,598
- Purchases of Fixed Assets: 650

== 182,636

2017

Net Profit before Tax: 249,181
+Adjustments For Non-Cash: 13,113
+Proceeds from Investments: 363,889
-Funding of Investments: 569,564
+Proceeds from new initiative investments: 2,623
- Funding of new initiative investments: 6,467
+ Proceeds from Financial Liabilities: 36,510
-Due from brokers and due to brokers: 41,678
+ Change in Operating WC: 4,988
- Purchases of Fixed Assets: 104

== 52,491

2016

Net Profit before Tax: 104,053
-Adjustments For Non-Cash: 46,971
+Proceeds from Investments: 180,772
-Funding of Investments: 275,698
+Proceeds from new initiative investments: 13,135
- Funding of new initiative investments: 4,274
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 5,868
- Purchases of Fixed Assets: 1,570

== -24,557

2015

Net Profit before Tax: 67,877
-Adjustments For Non-Cash: 2,899
+Proceeds from Investments: 140,196
-Funding of Investments: 91,932
+Proceeds from new initiative investments: 6,196
- Funding of new initiative investments: 21,265
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 6,829
- Purchases of Fixed Assets: 421

== 104,581

2014


Net Profit before Tax: 47,324
+Adjustments For Non-Cash: 4,615
+Proceeds from Investments: 63,010
-Funding of Investments: 91,022
+Proceeds from new initiative investments: 2,504
- Funding of new initiative investments: 2,821
+ Proceeds from Financial Liabilities: -
-Due from brokers and due to brokers: -
+ Change in Operating WC: 790
- Purchases of Fixed Assets: 100

== 24,300

I'm willing to hear suggestions for changes.
« Last Edit: July 16, 2019, 06:30:17 PM by Normax59 »

Liberty

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 11552
  • twitter.com/libertyRPF
    • twitter.com/libertyRPF
Re: BUR.L - Burford Capital
« Reply #156 on: July 17, 2019, 06:38:17 AM »
New post (part 1 of 2) on Burford by Scuttleblurb (subscription required):

https://www.scuttleblurb.com/bur1/
"Most haystacks don't even have a needle." |  I'm on Twitter  | This podcast episode is a must-listen

peterHK

  • Full Member
  • ***
  • Posts: 223
Re: BUR.L - Burford Capital
« Reply #157 on: July 17, 2019, 07:01:11 AM »
You can't think of it like that.

You have to be more creative.

What's the point of being cryptic? You are long. What formula/process did you use?

I don't actually think this is that hard. The key variables are what level returns stabilize at, and when. For that, you can run a sensitivity analysis on stabilized ROE vs. COE in however many years to get a P/BV multiple, and then work backwards: ROE x BV = $X of BV accretion per year etc.

E.g if ROE is 30% for 3 years and they reinvest all their earnings (yes a simplified assumption, but historically they have been able to reinvest OVER 100%), then 3 year out BV is $13.68/share.

If after that ROE drops to 15% vs. a COE of 10% and they never grow (again, an unreasonable assumption, but a conservative one), your justified P/B is 1.5. 1.5x 13.68 = $20.53/share.

Repeat the above with ROE at today's levels and dropping at various rates for 2,3,4,5 etc. years and you can get a pretty good idea of the range of outcomes.

Then ask yourself: how quickly will returns fall? Why might they NOT fall? How fast do they have to fall in order for me to lose money on this investment? Does it make sense that a business goes from earning 30% ROE's to 20% in 1 year? In 2 years? What competitive forces are going to make that happen in that short of a timeframe?

You cannot get the degree of accuracy with Burford that you can with many others; ROE can be lumpy, cash ROE is certainly lumpy depending on realizations. That doesn't mean you can't construct a range of outcomes, figure out which set (bull/bear/middle) look qualitatively more logical, and then construct the risk/reward on the investment.

My own view is that I find it very hard to believe that returns fall dramatically in the next 2-3 years, and because of that, the risk of a permanent loss of capital outside accounting fraud I feel is very low.




Schwab711

  • Hero Member
  • *****
  • Posts: 1635
Re: BUR.L - Burford Capital
« Reply #158 on: July 17, 2019, 07:39:11 AM »
Returns might not immediately fall if Petersen is successful. The implied odds of Petersen success is estimable based on secondary transactions made by sophisticated investors and Jeffries' estimate of the Petersen payoff, assuming success.

It is almost certain that one of the following is true: (1) BUR made a really bad decision selling their interest in Petersen (the true odds of success aren't so low); (2) the true expected outcome of Petersen, assuming success is much lower than $2.5b estimated by Jeffries; or (3) BUR is much riskier than you think.

Outcome #2 is probably closest to your "30% for a few years and falling". In that case, BUR will do fairly well. There are many outcomes where BUR will fall precipitously. I think the R/R skew for BUR is the reverse of what many assume. More Petersen-like cases is the only way to support 3x+ BV.

peterHK

  • Full Member
  • ***
  • Posts: 223
Re: BUR.L - Burford Capital
« Reply #159 on: July 17, 2019, 07:52:53 AM »
Do ppl bitch this much about unrealized gains when their PE firm marks up the value of their investment "becuz DCF"?

Take a look at some PE financials, let me know if you find one that has mark to market revenue represented 65% by unrealized gains. Unrealized gains are so minute for them its not even an equivalent comparison. And if they did I would bitch about it.

The idea that the secondary market represents some sort of all knowing entity that is appropriate to mark your investments to is questionable. Yes, Burford's marks are significantly below market, unlike BPY, but I think the principle stands (at least for me): we know their marks are conservative... [snip]



Further, I'd look at IAS 37 (https://www.iasplus.com/en/standards/ias/ias37)  as a sort of inversion for Burford: you mark litigation liabilities based on estimates and based on specific events happening. One marks liabilities similar to how Burford marks assets, which makes intuitive sense because Burford is the other side of those liabilities. This isn't a real estate asset where we can get this year's NOI, cap it, and boom, you have an asset value. These are all contingent assets. My reading of Burford holding this below the most recent sale price is that they have a different view of the risk than the market does.

Further, on contingent assets, one doesn't even recognize them AT ALL, until the recognition of income is virtually certain. One could argue Burford should account for cost only, and realize all gains on receipt of cash. I'd be fine with that tbh.


I'd be willing to bet that there will be A LOT of questions on the call about it, and a lot of discussion in the annual report on it.


The first part is literally the point of FV accounting. It's to mark positions at what the market would pay (not you, me, the company, or otherwise - what the mark would take the asset for). That's why secondary transactions (especially ones where you [the company]) are personally party to matter so much.

Second, IAS 37 specifically says financial instruments are exempt from the accounting standard you bring up. Litigation claims can be seen as roughly equivalent to CDS contracts. They have negative carry (expenses of case or on-going premiums for CDS) and have a binary payoff. The CDS has a known payoff vs unknown. In that case we can look at European call options, which have an unknown binary payoff. Both Euro calls and CDS are marked to FV greater than $0 without complaint. These are often illiquid markets and still marked to secondary transactions. I think BUR is misleading people with the idea of overly conservative accounting. At some point, it allows BUR to smooth results that by their nature aren't smooth (I'm repeating myself at this point but this feels like VRX so I'm not surprised).

Third, I agree and hope that this is addressed on the call. I understand strategically why BUR doesn't want to state their marks but that's the downside of taking outside money.



In other examples of 'conservative' being thrown around in potentially misleading ways, BUR said in the 11/12/18 investor day presentation that:
Quote
Only two investments that were written up, amounting to 0.2% of total write-ups by dollar value, have ever turned into a loss

First, this comment implies the loss was roughly $1m or so. It's a weird stat. Anyway, in the 2018 AR, BUR noted that one claim that was previously written up was twice written down 2 years ago and in 2H 2018, which caused a "fair-sized" loss. So while that stat was correct on 11/12/2018 about completed investments, it's misleading. It looks like BUR writes down multiple claims every semi-annual period.


On 7/25/2018, BUR noted in their 1H 2018 investor presentation regarding Petersen:
Quote
We sold 3.75% of our entitlement for an effective
cash price of $30 million, implying a valuation of
$800 million for the original total Petersen
entitlement.

We carry our Petersen investment at a
lower carrying value than that for the
reasons we have enunciated previously.

Obviously Petersen wasn't marked at an implied valuation of $800m at 6/30/2018 if the sale supporting that valuation occurred on 7/11/2018. What BUR wrote isn't wrong. It can even be read as an appropriate comment. It's about the method of communicating though. BUR is clearly run by lawyers that know how to spin a story.


I'm not trying to pick on you, Peter. It just feels like the narrative of BUR doesn't match the financial picture so i'm trying to attack the narrative.

I don't think CDS is the best analogue to litigation, but Euro calls are a good one. Burford doesn't mark their cases to $0, they mark them to where they feel is fair value, much as one would an undervalued euro call. How do you value a Euro call on a private asset that seldom trades, for instance? How do you measure the volatility input? All of these are assumptions that are part of valuing level 3 assets, which is what Burford's cases are. Again, they've said that sales ARE inputs, but not the only one. I am fine with this, I regularly aknowledge that my public market equity's intrinsic value does not move around as much as the share price. I'm 99% sure that the value of litigation does not move around as much as what the current market prices for it do.

I would see the issue with smoothing if they did not have a track record of cash realization. The issue with VRX was that the cash flows did not track in any sense to their "cash EPS" measure, and cash ROIC was consistently very low. They also shifted segments around all the time to obfuscate organic growth. IMO Burford is a mirror image of a lot of this: we can see they have cash realizations and what those are; we can see that cash ROIC on investments is high; and we can see they go to immense lengths to explain and give us information in their filings.

On claims being written down, the full quote was the following:

"What investors will note, however, is the reduction by a couple
of percentage points in the final two years before
conclusion (now 33% and 10% versus 35% and 12%
as reported in the 2018 interim report), which is
entirely due to the impact of a fair-sized investment
that ultimately lost and which we wrote down
partially two years before its conclusion and again
during the year of conclusion, which when netted
against valuation increases caused the numbers to
decline somewhat but also proves the point that
we change valuations in both directions"

I feel like owning up to this when the facts changed, and adjusting their numbers is not disingenuous or misleading, it's good disclosure. You also have to separate writing down on cost and writing down after writing up. Burford's claim is that it doesn't tend to write down cases it has first written up, as evidence of their conservative valuation. Again, the above case was a change to that fact, which they owned up to, disclosed and explained.  What Burford does not claim is that they don't write down cases held at cost. These result in the majority of their write downs.

I know you're not picking on me, but perhaps I'm biased in this, it seems like you're willingly picking at things rather than looking at what Burford does (e.g disclosing changes as per the above) right relative to peers in this industry. We can quibble on accounting all day long, but from the hundreds of reports I've read across industiries, I have seldom come across a management team that provides this much explanation and discussion in their reports. One view is that this is because they are good people trying to get us to understand the business; the other is that they are trying to explain away all the criticism. Which side you are on depends, I think, more on what type of person you are than the preponderance of evidence, because there is plenty of evidence supporting both sides.