I didn't have to look far, because financial results this week from a company I first reviewed nine months ago (Hyper value small-cap buy, 23 January 2012), provided a compelling reason to revisit the investment case and one I firmly believe will provide medium-term investors with substantial upside by buying now. The company is BP Marsh & Partners (BPM), a niche venture capital provider to early-stage financial services businesses (www.bpmarsh.co.uk).
Hyper value growth from Hyperion
What makes BP Marsh such an interesting, and remarkably low-risk, investment is that it owns a 13.84 per cent stake in global insurance broker Hyperion Insurance Group (www.hyperiongrp.com) - one of the fastest growing companies in the UK. It also has the backing of venture capital group 3i, which acquired a 27 per cent stake in Hyperion almost five years ago in a deal valuing it at £120m. Established in 1994, Hyperion specialises in wholesale and retail broking, reinsurance broking and underwriting in over 50 countries around the world. And, following the acquisition of Asia's largest independent insurance broker, Accette Insurance, Hyperion has increased its exposure to the region. Headquartered in Singapore, Accette also has offices in Hong Kong, Philippines, Indonesia, Malaysia and Thailand.
Hyperion also has exposure to Latin America, having earlier this month acquired a 51 per cent stake in Conset Seguros, a specialist broker in the construction industry. The acquisition provides Hyperion an opportunity to enter the Brazilian market, one of the world's fastest growing economies. This deal follows on from the acquisition of Windsor Limited, an international Lloyd's broking group providing insurance and reinsurance broking services to businesses and private individuals. For the year ending December 2011, Windsor reported total income of £37.5m and cash profits of £12m.
Hyperion is not only building up scale by acquisition, but is growing strongly on an underlying basis, too. In fact, revenues increased by 21 per cent to £87m in the 12 months to 30 September 2011, most of which was organic, and this follows on from a strong performance in the prior year when revenues rose by 26 per cent. In turn, Hyperion's cash profits have more than doubled to £18m between 2009 and 2011, and further strong earnings growth is expected in the financial year to 30 September 2012. In fact, factor in the contribution from Windsor, and Hyperion's pro-forma cash profits would have been £30m last year.
In my opinion, the £31.1m valuation BP Marsh & Partners attributes to its 13.84 per cent stake in Hyperion, valuing the equity of Hyperion at £225m, looks fully justified based on the profitability of the company once you factor in the acquisitions above. Moreover, this value is set to be crystallised when Hyperion floats on the London Stock Exchange next year. It's also worth pointing out that there are already buyers for shares in Hyperion ahead of the company's listing on the London market as BP Marsh booked a tidy profit on part of its stake earlier this year.
Anomalous valuation in BP Marsh
That's really worth noting because BP Marsh's stake in Hyperion is currently worth £4.7m more than its own market value of £26.4m even though the company is not in financial distress. In fact, BP Marsh had net cash on the balance sheet of £3.3m at its July 2012 half-year-end and also access to a loan facility of £4.3m. It also means that, despite holding the valuable stake in Hyperion, BP Marsh is being valued on an eye-watering 50 per cent discount to its July 2012 net asset value of £52m.
If that wasn't attractive enough, what this also means is that BP Marsh's other investments, worth £16.9m in eight other insurance companies, are in effect in the price for free. In other words, the company's £48m investment portfolio, of which the stake in Hyperion accounts for almost two-thirds weighting, offers rock-solid asset backing for anyone buying BP Marsh & Partners' shares now as, in effect, we are getting £25.6m of investments, including £3.3m of cash, in the price for nothing.
And it's not as though these assets are of low quality as they include a £691,000 holding in Randall & Quilter (www.rqih.com), a company I included in my 2011 Bargain Shares portfolio and one I continue to rate a buy. Of interest, too, is BP Marsh's 34 per cent stake in Besso Insurance Group, a specialist in insurance broking for the North American wholesale market, which has a carrying value of £4.3m (www.besso.co.uk).
From my lens, there is obvious value in BP Marsh's Aim-traded shares which, on a bid-offer spread of 87p to 90p, trade 50 per cent below the company's July 2012 reported net asset value of 178p even though there is a clear plan to crystallise value in Hyperion through an initial public offering (IPO) on the main London market. The lowly valuation also fails to acknowledge BP Marsh's enviable record of increasing net assets at an underlying annual compound growth rate of 12 per cent after running costs, realisations, losses and distributions since the company was established in 1990 (excluding £10.1m raised on flotation). It was more of the same when the company reported half-year results this week as it lifted net asset value per share by more than 7 per cent from 166p to 178p a share year on year.
In my view, BP Marsh's share price looks priced to perform strongly over the next six months as more investors cotton on to the fact that investing in the company is a savvy way of gaining exposure to Hyperion, one of the fastest growing companies in the UK and one that is planning to list next year. The company's house broker, Panmure Gordon, increased its target price from 125p to 130p post this week's results and, if achieved, this would provide us with 44 per cent upside to the current share price. I continue to rate BP Marsh & Partners' shares a buy.
