Positive judgement from the secondary market

Burford has announced a further sale from the Petersen case, the third in the last six months. On this occasion, they have sold 15% of the exposure for $66m, giving an implied value on the whole case of $440m. This is a 10% uplift on the value given by the previous sales, which was $400m. Having reduced their retained exposure to 75%, Burford have made commitments to keep at least 65% until the end of 2018 and at least 50.1% beyond that.

• Earnings: There will be a significant additional realised gain from the sale, which Hardman & Co estimate at $60m. There will be an effect on unrealised gains too, with our overall revenue forecast for 2017E increased by $99m. There is no effect on earnings estimated beyond 2017.
• Balance sheet: The sale will bring another $66m of cash back onto the balance sheet, which gives Burford plenty of capacity for investment when added to the £175m ($225m) proceeds of the recent bond issue. The increased asset value has mechanically reduced our RoE estimates for 2018E and 2019E.
• Valuation: With the sale only affecting 2017E earnings, this has little effect on Burford’s prospective P/E which remains good value despite the strong share price performance. The P/E for 2019E is only 14.6 times. The 2019E RoE becomes 16.6% on a larger book value, with strong growth which suggests excellent metrics all round.
• Risks: The investment portfolio is still diversified, with exposure to over 500 claims, but retains some very large investments, which means revenue may be volatile. As the company matures, we would expect that to decrease but not to disappear. The Petersen case shows that this volatility is not simply a negative.
• Investment summary: Burford has already demonstrated an impressive ability to deliver good returns in a growing market, whilst investing its capital base. As the invested capital continues to grow, the litigation investment business will continue to produce strong earnings growth.