UK Edition
Questor: don’t buy Burford’s fully priced shares, go for the bonds and get a 4.7pc yield
Litigation finance is a niche area but a growing one and one company that is actively involved, so far to great effect, is Burford Capital, now the third biggest stock on Aim, the London Stock Exchange’s junior market.
Burford funds lawsuits in return for a share of any compensation awarded. The company is also expanding its range by offering lawsuit defences (and taking a share of the money saved), while it can also sell a percentage interest in cases, sometimes for a healthy profit.
The shares (to which the numbers in the box refer) have performed brilliantly over the past 18 months, zooming from barely 200p to nearly £10.
That inevitably leads to the sinking feeling that you have “missed” this one, especially as the forward price-to-earnings ratio of some 20 times is relatively racy for a business that, by its nature, is not as transparent as some and whose earnings can be lumpy.
The timing and amount of any court payments are unpredictable, while in most cases the identity of clients is kept under wraps.
But there is another way to get involved in this company, which may appeal to investors who like the sound of a business whose legal skills provide a barrier to entry, and potentially lofty profits, but who would rather not take the capital risk that can come with paying high valuations for stocks. Burford has just issued a third bond on the London Stock Exchange’s Order Book for Retail Bonds (Orb).
The £175m issue was very successful and the bond, whose ticker is BUR3, pays a 5pc coupon and matures in 2026. The price has increased from 100p at listing to around 101.2p, so the “yield to maturity” (in effect, the annualised total return, including the small capital loss at maturity) is around 4.8pc.
Yet, as can happen with bond issues, investors may be neglecting the previous issues as they target the new one.
The 6.5pc coupon 2022 bonds (BUR1), which trade at 110.5p, offer a yield to maturity of 4.2pc and the 6.125pc 2024 paper (BUR2) has a yield to maturity of 4.75pc. The latter’s yield is therefore only a fraction below the new bond’s but with two years less to go before repayment, so the rewards are very similar even if the risk is less.
Patient buy-and-hold income seekers worried about the lofty valuation of the shares (and their lowly yield) may therefore like to look at the 2024 bonds. If there is an earnings stumble the shares could wobble but the bond coupons should still arrive twice a year, barring a total disaster (and in that case the share price would take the most fearful drubbing).
Telegraph Money has previously expressed reservations about the bond’s description as “guaranteed” but, as long as investors don’t take this as an indication that there is no risk, the bonds will appear attractive to many income seekers.
Questor says: buy
Ticker: BUR2
Price at close: £108.31
Update: Carillion
One of the lessons I have learnt from my 26 years studying companies is that the market is not always right but its views always have to be respected. When a share price moves it does so for a reason and if you hold an opposing view you had better have a very good, and very well researched, basis for doing so.
It is therefore interesting that shares in Carillion have quietly slipped below the 200p mark, last seen during the dark days of 2008, when it looked as if the whole world was going to hell in a handcart.
When we first flagged our concerns about the stock in March we noted how the year-end net debt pile of £219m (a figure that averaged £587m over the year) and the pension deficit of £663m meant that interest payments and pension contributions came to £107m, against an operating profit of £147m, leaving little margin for operational error.
On paper the yield is 9.4pc and the price-to-earnings ratio is less than 6 for 2017, but the share price implies that the market still does not believe the numbers.
All eyes will now be on the first-half trading statement due on July 11, and then the interims on August 23. Last year’s interim dividend was 5.8p and that will be the benchmark for investors.
Questor says: avoid
Ticker: CLLN
Share price at close: 197.1p
Russ Mould is investment director at AJ Bell, the stockbroker