BUR - Burford Capital Likely Has Further To Run After Legal Ruling

2023-03-31 15:15:00 ET

Summary

• Burford received a favorable ruling on its largest case today (YPF).
• This could result in a payment close of around $13/share in the best case, though there could be payment delays from Argentina.
• It also validates the operating business and may cause shares to re-rate to around $12/share excluding any YPF payment.
• I believe the potential YPF payment and operating business valuation are additive, creating a valuation of around $25/share and a clear margin of safety.

Burford Capital ( BUR ) is a "legal finance" business pursuing legal claims, at their own expense, taking the upside when they win or bearing the cost when they lose. Today, they received a positive summary judgment from the Southern District of New York in a big legal case relating to Argentina expropriating the shares of energy company YPF without any form of tender offer. We don't yet have a firm number as to the value to Burford, but this is directionally a positive outcome.

Sizing The YPF Judgment

The two claims held by Burford (Eton and Peterson) amount to 112 million YPF shares. Over time Burford has sold down its stake in both, to a combined 69 million shares, though note at this point Burford can't sell down its Peterson stake much further as it must retain a majority of that.

If a tender offer had taken place before the Argentine government expropriated it would have likely been at around $80/share (though this is debated, and we'll learn more in the coming weeks), that suggests a value of $5.5B. However, Burford has costs, fees and taxes against any ruling and Argentina will likely be slow to pay or may try to avoid payment entirely.

There's some very good analysis of the legal issues here , which is slightly outdated after today's judgment but still very detailed and informative.

As such, it's hard to know precisely what Burford shareholders will receive and when they will receive it. However, if the YPF value is around $5B, then consider that Burford's market cap is currently ~$2B at ~$11.60/share. That difference is stark. I suspect fees, taxes, and slow payment will erode the potential judgment's value, but there appears to be a margin of safety on the YPF payment alone, even if Burford had no ongoing operating business.

Operating Business

Then remember that Burford also has an ongoing operating business, yes the YPF matter is a large piece of it, but Burford is diversified, more so now assuming the YPF judgment can now be monetized and reinvested across a number of other initiatives or returned to shareholders.

If we assume normalized earnings of $0.8/share (looking at historical trends) on a 15x P/E that's $12/share. Again, note that Burford trades at that today, excluding any YPF value. One risk is that there is some double-counting there, as they have revalued their YPF claims over recent years through the income statement, but still, the underlying business is robust, and today's legal verdict likely makes that point clearer.

An Improved Business

It's also possible that today's judgment helps Burford re-rate. Previously there were concerns that the model did not work and that the YPF claims were too large relative to the rest of the business. Today's judgment weakens those arguments, as Burford's model has a clear success to point to and management's actions appear justified. In addition, it should be possible for the business to further diversify its caseload from here.

What To Look For

It does seem Burford, even after today's rally, could be mispriced. Either you're getting the operating business for free, or the market is undervaluing the YPF payout.

Valuation

Here's a rough valuation to illustrate the point. The notable thing is, even without the Peterson/Eton payment, there appears to be a margin of safety.

Risks

• Today's legal ruling, though favorable, does not give a clear payment number for Burford yet and has not received detailed analysis from Burford or legal experts at this point. Furthermore, taxes and fees could well reduce any payment to Burford and Burford's carrying value for the claim on the balance sheet is material at around $2B per their last 20-F from 2022 even before this ruling.
• There's certainly a risk that Argentina tries to avoid payment based on past behavior, and if successful in non-payment, then the value of the judgment does not matter.
• Burford is a relatively opaque business, requiring a lot of management judgment and commanding high salaries and fees.
• Prior to today's ruling, Burford had delayed their accounts as they worked through correct balance sheet valuations for their legal assets. That may still present a risk despite today's outcome.

Summary

Today's news is likely very materially positive for Burford, and despite significant remaining uncertainty, there appears to be an upside even after today's strong move in the share price. Importantly, this comes in two ways. Firstly and most obviously, potential incoming cash from the YPF outcome should ultimately flow to shareholders.

Secondly, skepticism concerning Burford's underlying business being opaque and not sufficiently diversified should now start to dissipate as they see results from a decision management invested heavily in over the years. Over the coming weeks with additional disclosures we should be able to finesse Burford's valuation further, but for now, it appears there is material upside from here if events continue to trend as anticipated, both from the cash from the YPF judgment and the re-rating of the business model after this apparent validation of it.

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