The fall out from the Woodford affair continues to unwind through various stocks. As I predicted the share price of the main investment trust vehicle, the Patient Capital Trust has continued to decline. We’ve had a retrace of the 40p barrier and the fund is currently trading around 44p. The NAV is now down at 79p compared t0 82p at the beginning of July. My finger in the air guestimate is that we’ll see the NAV dragged down to around 75p within the next few months.
Using my rough and ready reckoner of a 50% sensible discount to NAV, I think we can now reset the potential buy price for Patient Capital at around 38p. Not far to go.
Burford Capital also hogged the news last week. I did manage to have a good read through the Muddy Waters attack on the day and felt that about half of it hit the target, while the other half was way off target. As many have discussed corporate governance looks very weak. There are also sensible questions to be asked about how much of the book of banked profits have come from just a few big deals or from a more diversified portfolio. I also agreed with the questioning about head office expenses which seem extraordinarily high – but hey they are lawyers.
What seemed way off the mark to me was the argument that Burford was fundamentally insolvent. Some very big assumptions were made about the input and output side of the balance sheet and the cash flow statement, most of which weren’t remotely convincing.
My takeaways were as follows.
- I have been in the past a great fan of the litigation funding space in general and Burford in particular. But over the last few years, I’ve grown a great deal more cautious if only because everyone and their aunt seemed to be muscling into this space. So, although I suggested Burford was worth buying many moons ago, I’ve been clear of the stock for at least the last three years. I don’t claim any clairvoyance, just a natural contrarian cussedness at the almighty share price rise. Felt like the time to move on. Crucially I still wouldn’t be a buyer of the equity as I think there are now some solid questions to be asked about the business model of the sector.
- I am though a potential buyer of the retail bonds in Burford and especially the 2022 paper. On the day of the Muddy Waters report, I very nearly bought a wodge of the bonds at around £80 but then at the last moment had second thoughts. I should have listened to my instincts. My sense is that it is risible nonsense Burford is running out of cash and has no intrinsic value. It may have to restate some numbers and its share price might drift lower, but the balance sheet is in decent shape, especially if it is forced to sell assets to repair market confidence. The chances of not repaying in full that 2022 paper look very low to me and in the meantime, you are picking up a near 7.3% running yield for just three years. My own sense is that the retail bonds might drift lower again, possibly hitting £85 at which point I’d be a buyer.