Canaccord takes an axe to its target price for Burford Capital

1st May 2019 13:39

(Sharecast News) - Analysts at Canaccord Genuity slashed their target price on shares of stockmarket darling Burford Capital, flagging 20 areas of risk/concern to clients which they believed might be going unappreciated.The target price was cut from 1,543p to 1,196p and the recommendation was kept at 'sell'.Among other things, analyst Portia Patel saw a risk that the provider of arbitration and litigation finance might be forced to either pursue a new fundraising or cut back on lending should realisations fail to materialise at the level it was forecasting.They also challenged the company's claim to an 85% return on invested capital on concluded & partially realised investments, saying that their own analysis revealed a ROIC of 51% on those that had been concluded and of 36% for those that were partially realised.Hence, they cut their earnings per share estimates for the firm's financial years 2019 and 2020 by approximately 18% each one.Cannacord also said that the fact that 73% of Burford's adjusted profits before tax were the result of unrealised gains gave it "pause for thought".All in, they were at 47% and 39% below consensus for the company's EPS in 2019 and 2020, although they conceded that, perhaps unlike the rest of analysts, they did not forecast fair value movements, explaining that they were "impossible to predict"."Consensus may include fair value movements, although we are unsure as to how these would be modelled with any degree of accuracy," they told clients in a research note.Nonetheless, for 2019 they were still anticipating adjusted profits before tax would more than double, excluding fair-value movements.They were also careful to explain that "For the avoidance of doubt, we see real opportunity for investors in the growth of the litigation funding market.""Equally, we also believe BUR has built an impressive, market-leading position and is generating attractive returns."For their valuation, the analysts assumed an average 22.8% adjusted RoE excluding fair value movement for FY 2019-21, a 5% perpetual growth rate and a cost of equity of 12%.