Burford offers investors the opportunity to participate in the success of a leading finance and professional services firm focused on the growing global opportunities in litigation. By providing a range of specialised services to businesses and lawyers, Burford has established an impressive track record of generating superior financial returns. This record now allows investors to make meaningful conclusions about the effectiveness of the management team and its investment process. As its market continues to develop, Burford has significant potential to use its diversified skills to generate further growth.
Burford’s strategy is to use its market leading experience and team to grow the products and services to the litigation industry. Litigation investment will remain, at least for now, the primary product as the relatively untapped market offers a huge opportunity.
The key metrics of value creation are invested capital and the return on it. Although the latest cumulative RoIC is 71%, we suggest 60% as a better long term estimate. The invested capital should continue to grow quickly due to contingent and new commitment.
We believe Burford can achieve a RoE of 12%, whilst growing invested capital by 15%p.a. These are very strong metrics compared to the equity market, yet the shares trade on an underlying P/E of just 11.9x for the year to December 2015 on our forecasts, falling to 9.5x by 2017. There should be substantial upside in closing the gap to a market multiple for a growth company with Burford’s characteristics.
The investment portfolio is fairly focused with some very large investments, which means revenue may be volatile. As the company matures we’d expect that to decrease, but not to disappear. As expected, revenue from the insurance business is declining post the adoption of the Jackson reforms.
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.