Litigation funder Burford Capital (BUR:AIM) could be set to record full-year earnings in excess of $200m after it flagged one-off gains in an Argentina legal case.
Burford sold some of its interest in the Petersen V Argentina case to other investors at prices which indicate the asset is worth far in excess of a cost value of $18m (£14.6m).
Trevor Griffiths, analyst at N+1 Singer, says the transaction could result in a substantial increase in Burford’s revenue, earnings and book value when full-year results are announced.
LARGEST KNOWN CLAIM
‘A cash disposal of an immaterial interest in Burford’s largest known claim (Petersen V Argentina) is likely, in our view, to result in a material uplift to consensus 2016 estimated revenues, profits and year-end book value per share as a result of a change in fair value of this investment,’ writes N+1 Singer analyst Trevor Griffiths.
‘We estimate the (unrealised) gain per share conservatively to be a little over 55p. While some may hope the ultimate outcome of the Petersen case to be more valuable than this, the small nature of this transaction does not preclude further upside, but does add some tangibility.’
‘Our price target (583p) has not included specific amounts for the large Argentina cases, viewing them as somewhat exceptional in nature, but we suspect that some hope value is already reflected in the share price.
‘Notwithstanding this, we expect the shares to respond positively to the announcement.’
Shares in AIM-quoted Burford trade 9.7% higher at 628p for a gain of 55.5p a share.
AUDITOR SIGN-OFF
Sealed on 30 December, it’s not yet clear whether accountants will allow Burford to recognise all of the implied gains on the investment in results for the 12 months to 31 December 2016.
Sales of small parts of the Petersen V Argentina investment may not be representative of the value Burford would obtain if it sought to sell the entire asset. Auditors will need to take into account the transaction and form a view on how much additional value the company is allowed to recognise when signing off on full-year numbers.
$200 MILLION PROFIT POTENTIAL
If calculations by Griffiths at N+1 Singer are correct and auditors sign off on the valuation, gains on the investment could see Burford's full year profit exceed $200m.
First half operating profit at Burford was $62m and Griffiths says the implied unrealised gain on Burford's Peterson V Argentina investment is around $160m.
Consensus estimates for operating profit at Burford in the second half of 2016 had been £35m prior to today's news.
Griffiths cautions it is best to value Burford on its ongoing maintainable earnings, which are likely to be lower than $200m, rather than focusing on large exceptional gains in any one year.
SUSTAINABLE EARNINGS
Shares argued in its primer on litigation finance in November 2014 that companies like Burford should be valued on a tangible book value per share basis like investment trusts and other financial services companies. Some form of premium to book value, given Burford's track record of strong performance and uncorrelated returns, may be warranted.
Petersen V Argentina is a legal challenge funded by Burford in which it is alleged the country’s government failed to observe proper legal procedures when it nationalised energy company YPF.
Strong returns on Burford's portfolio round-off an impressive year for the Guernsey-headquartered business, which also agreed to buy rival Gerchen Keller for $160m on 14 December.
