Burford H1 22 Results: Duration and Cash Income Reconciliation

In Practise Analysis

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BUR H1 22 Results & Case Duration

Last week, BUR reported H1 22 results. The most important takeaway is that the company is cash break-even and tangible book value per share (TBVPS) didn’t change.

Source: In Practise, Burford Capital 10-KSource: In Practise, Burford Capital 10-K

This is mainly because cash realizations were slow; BUR is still seeing delays in case progression due to the backlog in courts from COVID. We recently discussed in more detail about BUR's lack of TBVPS growth over the last few years.

Although BUR-only commitments grew 4% YoY to $295m, a H1 record, deployments were down YoY to $128m. If we exclude the huge $138m deployment in H1 21 with the BOFC sidecar, ‘normal’ sized capital provision deployments actually grew in H1 22. However, we believe such outsized deals are now a regular part of BUR’s business and should be included in any YoY comparison.

Both deployment and realisations are slow. But management have always warned investors of this: they don’t know how or when cases will realise. And they likely won’t ever truly know. Because if they did, the beauty of capital markets would mean BUR wouldn’t be able to earn the underlying case ROI that it does today. BUR CEO warned us of this on the earnings call:

There are too many idiosyncratic variables in the mix beyond just understanding generally how long it takes for cases to get through courts. And so, it is not something that we believe that we can do with the kind of accuracy and reliability that we would be comfortable doing publicly. I would say, would that we could. But on the other hand, if this business were entirely predictable as to both duration and outcome, then we would not be able to generate the returns that we can, I think, is the countervailing factor. - Burford Capital CEO, H1 22 Earnings

In fact, even if BUR did understand the duration of cases, would it be wise to communicate this publicly? Competitors could better assess the risk of litigation assets and arbitrage BUR’s return. Investors would also plug the duration into DCF’s so precisely that BUR would become closer to a bank than a specialty litigation financier.

One of BUR’s most unique assets is the proprietary data set of historical arbitration settlements. The cash settlement and total return of such cases are proprietary to Burford. This gives the company a data advantage that other players can’t compete with. Especially in the larger, more complex cases. BUR can price most effectively for the largest and most complex cases that have the potential to drive the largest dollar return. It wouldn’t be wise to explain how BUR forecasts duration even if they did know!

Although courts are slow and duration for older vintages seems to be extending, BUR’s future cash realisations seem to be inflation-protected; it’s not clear exactly how BUR prices each case, but there is an inflation / duration-linked component of the payoff that protects the real return for the financier. BUR CIO recently explained:

Remember that none of these delays have impacted the merits. None of our cases have lost because of it. No plaintiff has given up a case. They have just affected the duration. And we also have mentioned in the past, sometimes the extension of timing can actually enhance our returns that our deals may be structured to increase our percentage or our multiple as time goes on. -Burford Capital CIO, H1 22 Earnings

Valuation

There is a healthy debate over how to value BUR. Should you use a multiple of BV or earnings? We look at both.

In H1 22, BUR was cash flow positive before redeployments and reported break-even net income. The capital provision income on BUR’s income statement can be misleading as it includes the net realised gains relative to the cost of original deployment plus FV gains in the period. It’s a non-cash measure.

BUR reports the reconciliation between proceeds from capital provision assets on the cash flow statement, which includes both the return of capital and return on capital, plus asset management and other cash income to total cash receipts.

In H1 22, BUR received $100m in cash receipts and reported $44m in cash opex and $32m in cash interest. This total cash received needs to cover the opex and interest of running the business, plus redeploy the remaining capital to grow the assets outstanding. On a cash basis, BUR was profitable, but on a reported basis due to FX changes and non-cash tax accruals, the company shows a small net loss.

Source: BUR H1 22 ReportSource: BUR H1 22 Report

Asset management performance and management fees are also starting to flow through with an estimated $35-40m in cash income for FY22.

In short, even with the courts jammed with BUR’s biggest vintages outstanding, the company is currently running at roughly cash break-even.

Source: BUR H1 22 PresentationSource: BUR H1 22 Presentation

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