Hi Pacman, I've looked into Burford in the past as well for...

Hi Pacman,

I've looked into Burford in the past as well for comparison.
As I said one of the fundamental differences with BUR and LCA is BUR's ability to raise debt capital at quite low rates of return. This has allowed BUR to grow substantially whereas LCA is more capital constrained for now.

Looking at the models I would expect a capital constrained company (LCA) to earn a higher ROIC as they cherrypick the best cases for their capital whereas BUR have grown by taking many more cases - the majority of BUR cases are "portfolio cases" (meaning they take all cases a lawfirm has rather than cherrypick or actively select each case). While the higher ROIC might be better the aggregate affect of BUR's leverage produces a better result IMO. Think of this in terms of Du Pont ROE analysis.

Another aspect you might not be aware of is that LCA profit on like for like base is actually superior. BUR profit includes "revaluations" in their case book. This means they mark to market the value of the cases through the P&L whereas LCA (and IMF) hold investments at cost. I've spoken to LCA about this in the past and they are happy with conservative accounting. I think as the industry develops and there develops a secondary market for cases (which BUR talk about) then you might see a switch but for now I am happy with the conservative accounting. To give you an idea of the impact this would have on the profit and loss at 30.06.18 there was roughly $14m in capitalised cases on the balance sheet. Under BUR accounting this would be marked to market meaning an additional $14m in profit (assuming a 2x ROIC).

Personally this is the way I do my model because it produces a result more in line with the underlying value of the business. Another way to apply this is to look at the latest 4C. LCA was expecting to deploy $4.2m in the current quarter so on "mark to market" BUR accounting generated LCA would have generated $4.2m in revenue (and as the LCA cost base is low most of this drops through to NPBT) in just the current quarter.