Another positive verdict

Burford’s results for 2016 produced another outstanding set of figures. Revenue grew by 60% to $163.4m with strong growth in the litigation finance business and an additional boost from a secondary sale in the Petersen case. On an underlying basis net income grew to $114m, a 75% increase despite the investment in growing capacity which increased costs. A combination of ongoing investment and gains and increases on valuation saw the fair value of the litigation assets increase 67% to $559m, underpinned by a growth in invested capital to $394m. With the results statement there was an announcement of a further sale of 9% of the Petersen case at a valuation of 20 times the cost of investment.

• Other businesses: Insurance had a very good result in 2016H2 and its earnings grew 7% over 2015. Judgement enforcement had a weaker second half, but still gave a first positive annual result of $3.1m. Gerchen Keller, with only two weeks within Burford in 2016, made a minimal operational contribution.
• Balance sheet: By Burford’s standards this has been a busy year. The main second half item was the purchase of GKC. Burford currently has ample cash for its needs, but as it continues to grow will probably need more funds later this year. This will most likely be a debt raising.
• Valuation: With performance again exceeding expectations Burford’s rating remains good value despite the strong share price performance. The prospective P/E for 2019E is only 13.1 times, while a prospective 18% RoE with strong growth suggests strong metrics all round.
• Risks: The investment portfolio is now quite diversified, but still has some very large investments, which means revenue may be volatile. The Petersen case provides a concrete example of this. As the company matures we would expect that to decrease, but not to disappear.
• Investment summary: Burford has already demonstrated an impressive ability to deliver good returns in a growing market while investing its capital base. As the invested capital continues to grow, the litigation investment business will continue to produce strong earnings growth.