The Petersen case relates to ownership of a 25% stake in YPF, which was expropriated by the Argentinian government. Petersen subsequently went into administration, and a claim was initiated for compensation for the loss incurred by the expropriation. Having started in 2015, this is a lengthy process. A trial court decision that the claims could be heard in the United States federal courts was appealed by Argentina last year. On 10 July, over one year after the appeal was argued, the US Second Circuit Court of Appeals affirmed that decision. The next step is for the substantive proceedings to recommence in the trial court. This decision came too late for the interim results as of 30 June, and Burford will consider the impact, if any, in the year-end valuation process.
Burford has announced further transactions relating to YPF claims. Eton Park, the third-largest shareholder in YPF, is dissolving and Burford has purchased rights to 70% (less fees and expenses) of its claim. To maintain Burford’s cash position in YPF claims, it has sold 3.75% of its Petersen exposure.
The Petersen sale implies a valuation of $800m, compared with the average traded value in 2017 of $660m. At end-FY2017, Burford valued its holding well below these levels. These transactions will be included in the interim results, but the valuation is likely to remain below the latest trade price.
Hardman & Co has not made any adjustments to forecasts in the light of this statement. The prospective P/E for 2019 of 15.7x is not excessive for a growth company, with a 26.9% RoE giving strong metrics all round.
The investment portfolio is still diversified, with exposure to over 800 claims, but retains some very large investments, which means revenue may be volatile. As the company matures, we would expect that to decrease, but not to disappear. The Petersen case shows that this volatility is not simply a negative.
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.