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The market sell-off has given the gift of cheaper Burford Capital shares
With the FTSE 100 hitting seven-month lows and the FTSE 250 at an 18-month low, investors are being given a rare opportunity to buy quality companies at knock- down prices.
One name which immediately stands out is Burford Capital (BUR:AIM), which provides finance for lawsuits in return for a share in the awards.
The law industry turns over more than $800bn a year and litigation finance is a growing trend with huge potential to provide capital to law firms and in-house legal teams.
Burford has grown its ‘assets’ or cash advanced to companies to fight lawsuits by 350% in the last four years as the business has taken off.
Income from these assets has grown by over 650% in the same period, with operating profits averaging 90% (in the first half of this year they hit 93%).
These kind of results helped the shares to rocket from 200p in 2016 to £20.00 in August this year, but the recent market sell-off has taken them back to £15.62.
The business is highly cash-generative which allows it to keep investing and new commitments hit a record $540m in the first half of the year.
Growth is coming both from new clients, who usually need finance for single cases, and existing clients who move from single cases to whole portfolios of cases.
Around three quarters of law firms for which Burford financed a single case have gone on to give it further business.
The company focuses on large cases and is careful to spread its risk by claim type, claimant, legal adviser and law firm to avoid concentration.
As the market leader, with close to a 60% share according to analysts at broker Keefe, Bruyette & Woods, Burford can take on more trial risk than its competitors which is a big competitive advantage and generates higher returns.
To help finance its expansion the company raised £193m from institutional investors at £18.50 per share at the beginning of October. The funds will be used to grow the business in the US and Australia, which are particularly litigious markets and where there is good scope to pick up new clients.
Due to the fall in stock markets individual investors can pick up the shares today at a 15% discount to the ‘smart money’ (the price at which institutions paid for the new shares a few weeks ago) which is almost unheard-of.
While the shares are weak and there’s no news flow we would pick them up as interest is bound to be rekindled when the company hosts its investor day on 12 November. (IC)
DISCLAIMER: The author owns shares in Burford Capital