Stockwatch: The most attractive growth stock of our time?

Is this the most attractive growth stock of our time? Litigation finance goes from strength to strength, with near-£800 million AIM-listed Burford Capital the industry leader.

This business involves taking a view on the outcome of a case, purchasing the right to a share in its outcome while bearing costs. This offers security for the client and a way forward if unable or unwilling to bear all costs. It appears to be gaining momentum after being limited mainly to insolvency cases since 1967, when it was first permitted in England.

Burford remains attention-worthy following excellent interim results and as the EU referendum result boosts medium-term attractions of US dollar earners.

Strong growth pregnant for more

Reporting in US dollars, Burford's growth appeal is shown by a 110% leap in litigation investment income to $64.4 million (£49.8 million). Generating $99 million of cash from operations has flushed capital to reinvest in new cases, augmenting the £100 million raised from last April's bond issue.

The end-June balance sheet shows $242m assets, $13m liabilities and $251m debtConsequently, $193 million of commitments were made to new litigation in the first half-year, up 2.7 times like-for-like, reflecting strong demand and the average investment rising well over $10 million. The second half of 2016 may not see such a high level of commitments, but management sees recent progress as "a significant structural positive for Burford and for the industry".

It does potentially raise the volatility of returns, although greater diversification should mitigate this. Of that $193 million committed, 90% was in "portfolio and complex structures" rather than single case litigation, with a rising number of clients attracted to Burford for this aspect of financing due to the group's capital strength.

The end-June balance sheet shows $242.1 million current assets, mainly $152.2 million cash in money market funds and the like, also cash-at-bank and money due from litigation settlements; versus just $13.0 million current liabilities. There is $251.3 million debt, mainly $144.0 million by way of a £100 million sterling retail bond issued last April.

Brexit boosts need for legal services

Management reckons uncertainty created by the EU referendum is likely to increase demand for legal services, with issues arising both ahead of Britain invoking Article 50 and during the two years it then takes to formally leave the EU. UK legal services will be priced more attractively by weaker sterling.

Dollar dividends offer sterling investors a hedge against currency weaknessNew senior appointments have been made both in Europe and America as "we see continuing signs of global enthusiasm for litigation finance". For example, Singapore intends to widen the legal areas in which it is permitted and there is rising demand from multinationals and insolvency situations globally.

Sterling's fall from about 1.50 to 1.30 versus the US dollar since the referendum enhances returns variously. It is expected to save $2.4 million annually in bond interest, reduce debt repayment by $38 million and raise the sterling value of US dollar denominated assets by $73 million. When April's sterling bond was converted promptly into US dollars, an average conversion rate of 1.5471 was achieved.

While the results don't provide a geographic revenue breakdown, note four, on taxation, shows subsidiaries in the US paying $2,443,000 (£1,830,000) tax and in Ireland $1,685,000, while the UK has reduced from $78,000 to nothing. The Irish domicile likely accounts for all European activities however Burford's principal offices are in New York and London, providing a global service.

It's likely the board will prioritise capital growth for the foreseeable futureWith dividends paid in US dollars, this offers sterling-based investors a further hedge against currency weakness should the UK economy and public finances deteriorate. After a 2015 full-year dividend of 8.0 cents, or 6.2p, a pay-out re-rating will be needed to make the dividend materially useful considering a 1.3% historic yield after the stock doubled this year to 400p this year - currently 390p.

With management owning significant equity/options and able to demonstrate such strong returns from re-investment, it's likely the board will continue to prioritise capital growth for the foreseeable future.

Looking cheap

Burford's income statement shows $52.2 million after-tax profit enhanced by $17.7 million exchange differences (on translation of foreign operations), versus a $1.3 million cost in the first half of 2015. Including this, earnings per share (EPS) soared 220% to 34.2 US cents or 26.5p; but ignoring what could substantially be an "exceptional" boost for this period, EPS rose 125.8% to 25.5 cents, or 19.8p.

A similar extent of currency tailwind may not recur in the second half, but anyway the appeal of this share is an annual EPS ballpark around 50p on a two-year view - i.e. a still-low price/earnings multiple below eight times as investment returns mature. If this rough projection is overdone then the rating anyway allows for it - so the stock's near-doubling this year to test 400p is amply justified.

On a chart basis, the stock has run into profit-taking following the interim results, yet weakness looks worth buying into - for investors with a multi-year view - considering Burford's underlying strengths.

Management has exceeded my expectations when first drawing attention to the stock's growth prospects at 135p just over two years ago - a good sign. Last January I reiterated at 220p, how the stock was poised to thrive independently of market turmoil back then, with Fidelity raising its stake from 5% near 9.5%.

"It's hard to see what might realistically disturb Burford's momentum, so keep it on the 'accumulate' list."

Scope for lumpy earnings make detailed projections - and how the market is likely to rate them - tricky. Yet it's hard to envisage this management slipping up; there's also a decent critical mass of talent and reputation driving growth. The stock's risk/reward profile remains attractive and I target 500p to 600p on a two-year view.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.