Last week was an extraordinary one for litigation funder Burford Capital (LSE: BUR). Its shares started the week at over 1,400p, crashed to an intraday low of 380p on Wednesday, following the release of a highly critical research report by short-seller Muddy Waters, before rallying on a rebuttal by Burford to end the week at 850p.
The volatility has continued today, with Burford releasing a statement, outlining what it claims is “evidence of market manipulation in Burford shares.” The share price moved as high as 916p in early deals, before dropping as low as 741p within two hours. It looks like it could be another extraordinary week. Could this be an opportunity to buy one of London’s hottest growth stocks?
Too hard
Burford listed on AIM in 2009 at 100p a share. The shares reached an all-time high of 2,045p (giving it a market capitalisation of £4.3bn) less than a year ago. Big growth stories like this tend to get a fair bit of coverage here at the Motley Fool, but in contrast to the likes of Boohoo and Fevertree, which have been written about many times and by many of our writers, only a few of us have ever felt the urge to pen articles on Burford.
I’ve never covered the stock before. I’ve looked at it from time to time, and it’s always gone back on my ‘too hard’ pile. These are companies where I’m not sufficiently confident in my understanding of the accounts and/or how to value the business to consider buying the stock. Equally, while they may have one or two characteristics that I consider potential ‘red flags’, they’re insufficient in number to give me a strong conviction the stock should be avoided.
Has the Muddy Waters report or Burford’s rebuttal clarified matters one way or the other, or does the company go back on my ‘too hard’ pile?
Management promise
One of the central difficulties with understanding Burford’s accounts is that part of its revenue at any one time, comes from writing up the value of disputed court cases that haven’t yet concluded. The company says it employs accounting standards that are “used widely across the financial services industry.”
However, in the wake of the Muddy Waters attack, other litigation funders have been vocal in their implied criticism of Burford’s accounting. Australia’s IMF Bentham said it carries its claims at cost throughout and “does not record any unrealised gains.” Likewise, London-listed Litigation Capital Management told the Financial Times, “there is no fair value accounting in our numbers.” Meanwhile, Institutional Investor reported: “The firm uses different accounting procedures than most in the industry, according to [US litigation finance consultant] Charles Agee, who said Burford is unique in its approaching (sic) to accounting and asset valuation.”
I was partly, but not wholly, satisfied by Burford’s explanation of its business, accounting and corporate governance in its written response to the Muddy Waters report and on a subsequent two-hour conference call. However, a theme on the call — even among City analysts supportive of the company — was a plea for further disclosure and transparency in its financial reports.
Management has promised to take on board the concerns and suggestions of analysts and investors. I would welcome that, but for the moment Burford has to go back on my ‘too hard’ pile.
