Burford Capital. Arbitration judgement shows value of patience. 24 th July 2017

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1 24 th July 2017 Financials Daily BURF.L Line, BURF.L, Trade Price(Last), 26/01/2017, 637.0, -11.0, (-1.71%) Market data Source: Thomson Reuters Eikon EPIC/TKR BUR Price (p) m High (p) m Low (p) Shares (m) Mkt Cap ( m) 1,978 Total Assets ($m) 1,050 Free Float* 86% Market AIM *As defined by AIM Rule 26 Description Burford Capital is a leading global finance and professional services firm focusing on law. Its businesses include litigation finance and risk management, asset recovery and a wide range of legal finance and advisory activities. Company information CEO CIO Chairman Key shareholders Christopher Bogart Jonathan Molot Sir Peter Middleton +1 (212) Directors 14.0% Invesco Perpetual 25.0% Woodford Investments 10.0% Aberdeen Asset Management 4.9% Next event 27/01/ /01/2017 (LON) F M A M J J A S O N D J F M A M J J A S O N D J Q Q Q Q Q Q Q Q Jul 2017 Interim results Analyst Price GBp Brian Moretta bm@hardmanandco.com Auto Burford Capital Arbitration judgement shows value of patience On Friday a positive judgement was received in one of Burford s long standing arbitration cases. In the claim by Teinver S.A. and others against Argentina, an award of $324m plus interest was made. While there are several factors to be resolved, Burford estimate their share of the award at around $140m, subject to an ongoing compound interest calculation. This compares with a current investment of $13m and an approximated balance sheet value of $30m. Although the company has yet to discuss with their auditors, they note that booked gain will not approach the full $110m difference in their year end financials. Caveats: We understand that a decision about whether to appeal will be taken in the next 90 days. It is not certain that this will happen, but if it does, then the appeal court may change the amount of the award or even reverse the decision. Effect on forecasts: With the interim figures coming out on Thursday and our forecast already including significant approximations for the Petersen case and assumed gains, we have not made any adjustment to our 2017E forecasts for now. Valuation: Although our estimates for future years have seen smaller upgrades than 2017E, Burford remains good value. The P/E for 2018E is only 18.5 times. The 2018E RoE becomes 15.9% on a larger book value, with strong growth which suggests excellent metrics all round. Risks: The investment portfolio is diversified, with exposure to over 500 claims, but retains some very large investments, which means revenue may be volatile. As the company matures, we would expect that volatility decrease, but not to disappear. The Teinver case shows that this volatility is not simply a negative. Investment summary: Burford has already demonstrated an impressive ability to deliver good returns in a growing market while investing its capital base. As the invested capital continues to grow, the litigation investment business will continue to produce strong earnings growth. Financial summary and valuation Year end Dec ($m) E 2018E 2019E Revenue Operating Profit Reported net income Underlying net income Underlying Return on Equity 12.1% 16.0% 22.2% 35.8% 15.9% 16.6% Underlying EPS ($) Statutory EPS ($) Dividend per share ($) Yield 0.6% 0.7% 0.8% 0.9% 1.0% 1.2% NAV per share ($) P/E (x) (underlying) Price/NAV (x) Source: Hardman & Co

2 Revenue Revenue ($m) E 2018E 2019E Long term growth depends on pace of investment and outcomes Accelerated investment in 2016 will boost 2017 and 2018 revenue 2017 figures boosted by sales from Petersen case and result of Teinver claim GKC acquisition adds revenue from 2017 onwards Interest Cover 20 No debt prior to 2014 Multiple of interest E 2018E 2019E Retail bond issues in 2014, 2016 and 2017 $43.75m loan note issued for GKC acquisition now redeemed 2014 issue was mid-year so only partial accrual of coupon EPS and dividend Underlying eps ($) Dividend ($) 2017 results boosted by sales from Petersen case Full effect of large single $100m investment coming through properly in late 2016 and into 2017 Some large single claims may increase volatility in the future E 2018E 2019E 0.00 Source: Company data; Hardman & Co 2

3 Effect of transaction The Teinver case is one of Burford s long standing investments, and is one of the three individual claims from the 2010 investments which are significant in size and are yet to be resolved. The matter is based on the expropriation of two airlines, Aerolíneas Argentinas and Austral, by the Argentinian government in At the time of expropriation, the government paid one peso in compensation, claiming the companies had negative worth and they were saving them. The arbitration process ultimately adopted the valuation from an international investment bank to come to the figure of $324m. Argentina has 90 days from the date of the ruling to decide whether to file for an annulment, the equivalent of an appeal for this form of arbitration. Historically it has tended to do so, though the grounds on which it can do so are narrower than for normal court cases. Despite the amount involved, the decision as to whether to file for annulment does not look straightforward. Strategically it makes sense to fight to discourage other cases. However, there will be additional costs in doing so. Politically, the government has already pinned the blame squarely on the preceding Kirchner regime. While we expect the government to file for annulment, we would not entirely be surprised if it does not. We understand that under the annulment process the ultimate timing of the decision is subject to the usual legal uncertainty, but most results are obtained within a couple of years. As part of this there may be discussions about a settlement. This is quite common, and could simplify the process and guarantee payment in return for a discount on the claim. Obviously, there can be no guarantee such discussions will take place or, if they do, whether they will lead to an outcome. All decisions remain with the claimants and are out of Burford s control, though we would expect some consultation to take place. The arbitration panel that is being used, International Centre for Settlement of Investment Disputes, is a part of the World Bank Group. Any results have the force of a High Court judgement and enforcing the claim, if that is necessary, should be straightforward. Although some parts of the press have made a connection with the Petersen case, the only overlap is the involvement of Argentina and there is no read-across from this result to that claim. Effect on Burford s financials Burford s policy is that they will not take the full amount of a claim where there is outstanding legal risk, something that clearly applies here. However, as an H2 event this will not be included in the interim results and Burford will not need to value it until the year end, when things may be clearer. The Burford part of the claim will accumulate interest over time, and we understand it will be at a rate in excess of that currently applicable to the overall claim. This means that even if the actual result is as announced, the amount payable to Burford, and its share of the overall claim, will increase over time. 3

4 Although there is pressure on analysts to make adjustments immediately, we are not going to do so on this occasion. The main reason is that our forecasts already contain significant figures for the Petersen case that are really educated guesswork. Also, we have already made assumptions for growth in the portfolio, and as yet we do not know if this is a big gain on top of another great year, or an offset to a weaker performance elsewhere in the portfolio. For both we will get much greater clarity on these when the interim results come out later this week. Summary This is clearly another piece of positive news for investors. Although it may still be some time before the actual amount is known and any cash paid, this looks to beanother substantial gain for Burford. It has taken seven years to get to this stage, and maybe two years or more before the final payment is received, but this case demonstrates the value of patience and a balance sheet that is strong enough to carry such claims. Although there is no direct read across to other cases, we note that Burford has other substantial claims that remain unresolved and have the potential to produce similar results. 4

5 Financials and Forecast We note, as before, that our revenue forecasts largely reflect an expected average based on analysis of Burford s track record. Individual cases are binary in nature and, therefore, impossible to explicitly forecast. As this announcement demonstrates, Burford has a few large cases, including the Petersen claim, which may have a significant but impossible to forecast impact on the results. Summary financials Year end Dec ($m) E 2018E 2019E Revenue Expenses Operating Profit Finance cost Exceptional items Reported pre-tax Reported taxation Minorities Underlying net income Statutory net income Underlying Basic EPS ($) Statutory Basic EPS ($) Dividend ($) Balance sheet Total equity Invested Capital Fair Value Balance , ,451.3 Total Assets , , ,563.6 NAV Per share ($) Return on Equity 12.4% 15.8% 21.0% 35.8% 15.9% 16.6% Source: Hardman & Co, 1=$1.27 5

6 Notes

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