Since famed short-seller Muddy Waters published its short dossier against Burford Capital (LSE: BUR), shares in the company have been on a rocky ride.
After falling to a low of 600p shortly after the publication of the report, the stock rallied back up to 880p in the weeks after. However, since peaking at this level on August 15, shares in the litigation finance provider have struggled to move higher. They are currently changing hands at just under 800p.
Exchanging blows
Burford and Muddy Waters have traded blows over the past few weeks, with neither party managing to establish a lead over the other. The firm continues to claim that it has done nothing wrong. Although it has tried to clean up its image by replacing the finance director who was the CEO’s wife.
Unsurprisingly, Muddy Waters said this doesn’t go far enough. The hedge fund has also declared that it is not finished with Burford, and could have further evidence to present to the market about the firm’s business practices.
And this is what leads me to conclude that shares in the firm could fall further from current levels. The company relies on third-party financing to fund its litigation cases. Burford then takes a cut from the management of these funds. If this battle with Muddy Waters has impacted the enterprise’s ability to raise capital, then its entire business model could be under threat.
Legal action
The company is also facing pressure over its debt recovery efforts. Last month it emerged that the business had traded sexually explicit material with a third party. Burford made the trade as part of a deal to get its hands on documents relating to a judgement it is enforcing.
It has since been reported that the unidentified woman in the video is looking to pursue a case against the business. Under the revenge porn laws introduced in England and Wales in 2015, trading sexually explicit material of a person without their knowledge is illegal. Burford claims it was acting on the right side of the law, but this isn’t going to help the company’s reputation.
Too much risk
Only time will tell if all of the above will prevent it from raising additional capital and pursuing further court cases.
I’m not an investor in the shares, but if I were, I wouldn’t want to wait around to find out. At the time of writing, the stock is trading at a price-to-tangible book value of 1.4, which implies that in the worst-case scenario, the shares could be worth 566p or less, around 30% below current levels.
That’s assuming that the figures on the balance sheet are reliable. Muddy Waters claims they are not. If that is the case, the potential downside could be substantially higher than the published tangible book figure.
So, that’s why I think the Burford Capital share price could fall another 30% from current levels. In my opinion, it is so difficult to tell what the future holds for the company from here.
As a result, even though the stock could double from current levels if it returned to its historical average P/E of 11.5, I think there’s just too much uncertainty surrounding the future of the business.