Burford Capital’s US listing will test its fair value

Burford Capital, Aim-quoted litigation funder, is to float shares in the US.

Chief executive Christopher Bogart, a lawyer and no relation of Humphrey, has got over his initial uncertainties. In August last year he said: “We’re not entirely clear of the benefits other than possibly, at a moment like this, it might make people feel any better.” That was after short-seller Muddy Waters’ attack which poleaxed the shares. 

Now Mr Bogart reckons a US quote will boost the shareholder register and the value of the group, which is trading on about 5 times forecast earnings before adjustments and uglies. You’d think that he might be wary of floating shares anywhere near Muddy Waters, which was rude about Burford’s accounting methods. But there may be something in being seen to comply with a more rigorous listing regime than lightly regulated Aim.

That said, Lombard struggles to see a place for any litigation funder on any public market, whether in the UK, US or elsewhere.

The group has improved its governance and begun to disclose more in preparation for a US listing. But its numbers — based on what bean counter standard setters describe as fair value accounting — are still anything but straightforward. It bankrolls complex and often long-running court cases. The prizes can run to oodles in settlements or awarded damages. But the costs can run to many millions, too, and cases last on average two-plus years. In 2019, half of Burford’s £356m in revenues were unrealised gains. 

Now and then, Burford may sell a share of a case to outsiders and bank the cash. Since 2017, it has sold almost 40 per cent for $236m in the high-profile claim being pursued against the Argentine government for seizing energy assets from investors in 2012. That lawsuit now represents half of the value that Burford puts on its total portfolio and 95 per cent of unrealised gains. Other cases, where third parties have not paid hard cash for stakes, are more difficult to quantify. And Burford discloses little about ongoing cases, impairments or the cost of losing suits. 

Bulls look misty-eyed at the group’s record in backing winners. Past returns on invested capital have topped 93 per cent, says the company. But the past is no guide to the future. Many analysts reckon returns will halve next year.

Covid-19 may throw up opportunities, as Mr Bogart thinks. But it has also delayed cases. Litigation funding aficionados argue a year is too short a timeframe to take a view. Returns are lumpy, says Burford, which was once the darling of disgraced investment ace Neil Woodford. Too true. Investing in porridge might be more sustaining. 

Two wheels good for Halfords

Apocalypse averted. When retailer Halfords guessed at the impact of Covid-19 on sales for the year, two days after lockdown started, its central scenario planned for a 25 per cent fall in revenue. There would be “significant sales declines” from April to June, Halfords reckoned, then weakness for the remaining nine months of its fiscal year. 

How wrong it was. Sales for the quarter to July 3 were only 2.8 per cent down on last year, or 6.5 per cent like for like. Now its three models for how the rest of the year plays out are based on a 9.5 per cent sales decline at worst, at best a 5 per cent fall. Peel Hunt analysts call that conservative, recession or no recession. 

Halfords has benefited from the switch away from planes, trains and automobiles to cycling. Bike sales are up almost 60 per cent year on year. That has helped alleviate the 45 per cent drop in motoring revenues. Two wheels good, four wheels bad. Its billing as an essential retailer was important too. When Halfords briefly shut down stores at the end of March it lost about £15m in sales and up to £3m in profits, it reckons. Continuing to trade through the rest of lockdown, through click and collect to start then via socially distanced stores from late May, made all the difference. 

But Halfords’ forecasting misfire also shows how retailers may have underestimated the resilience of British consumers. When J Sainsbury, another retailer that has been upfront with investors about its modelling, published its sales scenarios at the end of April, it forecast that Argos sales would fall by a low-teens amount through lockdown and beyond. Instead, Argos sales rose 11 per cent year on year in the 16 weeks to the end of June, a result that can only partly be explained away by sunny skies and stay-at-home barbecues. 

Next’s number-crunching when it publishes a quarterly trading update later this month should be equally illuminating. Simon Wolfson put out 10 pages of stress testing with the retailer’s full-year results in March. Six weeks later, the company came out with another 13 pages of even gloomier analysis. 

Shares in Halfords still fell 9 per cent on Tuesday as it prepared investors for profits to fall, if indeed it turns a profit at all. This won’t be a banner year. But doomsayers will have to wait to crow another day. 

Burford: kate.burgess@ft.com
Halfords: cat.rutterpooley@ft.com