The share price of AIM-listed litigation funder Burford Capital (LSE: BUR) was trading above 1,500p as recently as July. However, on 7 August, it collapsed to 605p (recovering from an intraday low of just 380p).
The reason for the extraordinary slump was the publication of a scathing report on the company by renowned short-seller Muddy Waters. Burford has since fought back with a series of return volleys, the latest released this morning, and sent its shares as much as 7% higher in early trading.
There’s further upside potential of 75% if the shares were to get back to their pre-short-attack level. Do I think it’s time to snap up the stock?
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Attack and defence
The Muddy Waters short dossier on BUR had a number of planks. Its key claims were:
- “Enron-esque mark-to-model accounting… aggressively marking cases in order to generate non-cash fair value gains”
- “Net realized returns have relied on a very small number of cases”
- “Liquidity is risky, and it is arguably insolvent”
- “Governance strictures are laughter-inducing”
Burford has responded with counter-statements, a conference call with investors and analysts, and by taking action on governance. We’ve also seen one of BUR’s institutional investors, Caro-Kann Capital, publish a point-by-point rebuttal in an extensive report titled ‘Muddy Waters Dreams of a Black Cat That Just Is Not There’.
Favourable impression
Overall, I think Burford and its ally have done a decent job of addressing the areas of legitimate criticism/questioning in the Muddy Waters report, as well as exposing a number of factual inaccuracies in it.
Today’s publication from BUR – titled ‘Briefing on Fair Value and Return Computations’ — adds to my favourable impression. And, as already mentioned, the market has responded positively.
The investment case for the company is that it’s the market leader in a growth industry, where returns are uncorrelated with the performance of the wider economy. This is clearly an attractive set of attributes for investors. What’s less clear to me is how to assign a value to the company.
Valuation matters
At a current share price of 850p, BUR’s market capitalisation is £1.86bn. Net assets at the last balance sheet date of 30 June were $1.57bn (£1.26bn at current exchange rates) and the company’s trailing 12-month profit after tax was $388m (£273m).
We’re looking at a valuation of 1.5 times book and 6.8 times profit. The former (an asset valuation) would be appropriate for an investment company, such as a real estate investment trust. The latter (an earnings multiple) would be appropriate for an operating business.
For an investment company, 1.5 times book value would be pricey, but for an operating business 6.8 times profit would be cheap. The problem is I think Burford falls somewhere between the two stools, making it difficult for me to decide whether the current share price represents good, fair, or poor value.
I don’t go along with the line of thinking that “the share price has fallen a lot, so it must be cheap.” I want to be confident I have a good idea of the intrinsic value of a company before I invest. Unfortunately, in Burford’s case, I don’t. It’s just the way it is sometimes.
