Stockwatch: A value share still under the radar

At a time when stock-picking often involves juggling cyclicals exposed to any downturn, versus speculative growth plays on high ratings, it's a relief to see strong progress that is modestly rated. AIM-listed litigation finance specialist Burford Capital has released excellent 2014 figures (in US dollars, see table) including a 34% rise in the dividend, although the prelims release otherwise has little detail and it’s a case of waiting for the annual report. Meanwhile, a presentation has been published on the company's website which has interesting figures on the scale of opportunity presented by the litigation market where Burford is international market leader.

"The law market is enormous and capital starved"

This is the central proposition behind Burford Capital: how law firms lack external capital to enable them to take litigation risk and meet client demands, in a US market alone representing some $300 billion (£205 billion) annual revenue, and where six UK law firms would be in the FTSE 100 index if listed. It was a key reason I drew attention to Burford, which operates both in US and UK litigation cases, as a tuck-away stock at 135p last May, also considering this rather unique sector should be reasonably protected from the volatility of business cycles.

Admittedly, the stock has not been exciting since, trading currently at 142p, but you can see from the latest figures why Burford remains interesting. Besides a 43% jump in operating profit and 35% hike in net income, cash generation from the "investment portfolio" (of litigation cases) has also nearly doubled to $63 million (£42.4 million) and a 17% return on equity was achieved. That's some financial dynamics.

New commitments over three times 2013's level

Another significant factor arising is over $150 million in new investment commitments last year, relative to 2013, enabled by a similar value of retail bonds issued last July on the London Stock Exchange.

All this should bolster medium-term prospects towards further strong reporting. Possibly a lack of awareness among private investors results from no coverage in databases such as Company REFS - due to Burford being domiciled in Guernsey - hence there is no consensus forecast easily available. Share price websites cite brokers Esprito Santo upgrading their target to 149p last January, Liberum Capital with 156p last September, and RBC Capital Markets looking for 190p.

About 150p/share looks very modest considering the earnings potential. Burford hasn’t yet presented its 2014 earnings per share. Instead, it cites a doubling of the dividend payout over 5 years to 7 cents or 4.7p a share. Since this only represents a yield of about 3.3% at the current share price, such a dividend-based valuation is hardly compelling; however, page 11 of the website presentation cites "formulation of revised dividend policy" including "goal to pay a dividend that provides an appealing yield but that also encourages reinvestment in the business to produce capital appreciation." The possibility of special dividends or share repurchases is also entertained depending on "extraordinary success." The dividend currently appears covered 3.8 times by earnings, i.e. scope in principle to expand it, although this depends also on perceived investment opportunities (it might be better to prioritise for higher returns).

2014 earnings per share can be estimated according to the interim statement citing 204.5 million shares issued at end-June - hence £36.5 million (equivalent) after-tax profit implies earnings per share of 17.8p and a normalised price/earnings multiple of only 8 times (based on a 142p market price). Mind how the summary financials cite profit "before exceptional costs" such as relating to "the Burford UK acquisition, the 2012 re-organisation and 2013 UK restructuring costs". But as these charges become history, attention is likely to grow on the upshot for earnings from an expanding portfolio of litigation cases. There's a good chance of robust growth continuing.

Stable institutional holders, with directors adding stock

The company website, securities information page cites Invesco Perpetual owning the maximum 29.9% holding before being required to table an offer; then Eton Park which is a respected hedge fund founded by a former Goldman Sachs partner, with 8.8%; and Neil Woodford's fund, owning 7.2%. These stakes have appeared committed with no active trading, as if they sense Burford's long-term potential. Similarly, two executive directors who own 6.5% and 6.3% respectively, with the trend in directors' dealings on the "buy" side, the last two being a purchase of 60,000 shares at 122p last October and another non-executive director buying 50,000 shares at 123p last September. This is positive compared with enough firms whose directors cash in during the early listed years, and institutions flip stock after a placing.

Stockmarket should eventually recognise value

For a company only in its sixth year of operation, Burford is making good progress - a function of its leading position in a very substantial marketplace which should be resilient to business cycles. The principle risk in an operation like this is any falling out among key partners and the business splitting, something it is often hard to judge from the outside. However, the top men should be focused by their equity. Being AIM-listed and Guernsey domiciled doesn't help Burford get on people's investment radar, and management might have provided fuller details in its prelims' release like other firms do. But, ultimately, the market will recognise value if Burford continues to grow apace, making even a 190p target look modest by way of earnings valuation.

For more information see burfordcapital.com.