It would appear that other investors have been taking a look at the company's assets, too, because BP Marsh has just announced that "it is in discussions with a potential acquirer of all the shares of Hyperion Insurance Group". The company's share price soared 11 per cent to 123p on the news, which means that if you followed my advice to buy at 90p at the end of October, a price available in the market when my article went live, you will be sitting on a gain of around 33 per cent. I also advised buying at the same price a year ago ('Hyper value small-cap buy', 23 Jan 2012) and selected the company as one of top five stock picks at Investor Chronicle's summer roadshow at the BMA last June.
However, even though we are all sitting on hyper value gains, it's best to resist the temptation to bank profits because there could be further significant upside if a deal is done.
Hyper value growth from Hyperion
That's because BP Marsh's 13.84 per cent stake in global insurance broker Hyperion Insurance Group (www.hyperiongrp.com) - one of the fastest-growing companies in the UK - is in BP Marsh & Partners last accounts at £31.1m, valuing the equity of Hyperion at £225m.
At that level the holding is worth 106p a share of BP Marsh & Partners net asset value of 178p; and once you factor in net cash of £3.3m on the company's balance sheet, worth a further 11p a share, that means the stake in Hyperion and net funds accounts for 117p of BP Marsh's current share price of 124p. This leaves a portfolio of eight other investee companies valued at £16.9m, or 57p a share, in effect in the price for free.
It's not as though these assets are of low quality as they include a £0.7m holding in Randall & Quilter (www.rqih.com), a company I included in my 2011 Bargain Shares portfolio. Of interest, too, is BP Marsh's 36.71 per cent stake in Besso Insurance Group, a specialist in insurance broking for the North American wholesale market, which has a carrying value of £5.1m (www.besso.co.uk).
Moreover, with BP Marsh's shares trading on a 30 per cent discount to book value of 178p a share, the current valuation fails to acknowledge the company'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 it was established in 1990 (excluding £10.1m raised on flotation). It was more of the same when the company reported half-year results last October when net asset value per share rose by more than 7 per cent from 166p to 178p year on year.
Deal or no deal
True, there is no certainty a sale of the stake will happen, but the fact that Hyperion has been lining up an IPO on the main London market later this year and BP Marsh is now talking to other parties interested in buying the whole of its stake ahead of that IPO, clearly favours a deal being done. That’s because it would enable BP Marsh to crystallise significant gains on the holding in Hyperion without having to wait for the IPO, while the purchaser of the stake could potentially benefit from any upside in the investment between now and the IPO and in the aftermarket, too.
Moreover, the £225m valuation of Hyperion looks fully justified and it’s worth noting that BP Marsh found buyers for part of its stake in line with this valuation last year. It is entirely possible that BP Marsh could find a buyer at a level that values its stake above the carrying value of £31m. That’s because Hyperion's operational performance has been eye-catching. In fact, in the financial year ending 30 September 2012, Hyperion grew underlying revenues on continuing operations by 12 per cent to £111m, an increase of 42 per cent including acquisitions, and raised cash profits by 40 per cent to £20.6m.
Trading strategy
In my view, news of a confirmed sale of the Hyperion stake could see BP Marsh’s share price move sharply up to around 150p, of which 117p of that share price would be fully backed by cash. It would also mean that the investment in those eight other investee companies, worth 57p a share, would be attributed a modest value of 33p. So, if you followed my previous advice, I would recommend running your profits with BP Marsh's shares currently trading on a bid price-to-offer price spread of 121p to 125p.
If you missed those articles, and have no holding in BP Marsh's shares, they look an interesting investment opportunity on a risk-reward basis offering a potential 20 per cent further upside to my target price of 150p in the event of a sale of the Hyperion stake, and downside limited to around the 110p level.
■ Finally, I will be taking a four-week break during April to complete a book on 'Profitable stock-picking', my follow up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 17 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Bellway (Profit from the London property boom, 30 January 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates (Taking profits after a winning streak, 28 January 2013)
Market timing(Lessons to learn, 24 January 2013)
Communisis, Netcall (Bumper trading gains, 23 January 2013)
Crystal Amber, API, Sutton Harbour (More upside to come, 22 January 2013)
PV Crystalox Solar (Seeing the light, 21 January 2013)
Bloomsbury Publishing (A publisher for the digital age, 18 January 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 (Stockpicking Marvels, 16 January 2013)
Eros (A share firmly in the picture, 15 January 2013)
Netcall (Jumping the gun: take two, 15 January 2013)
Moss Bros, Communisis (Jumping the gun, 14 January 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures (Small cap wonders, 11 January 2013)
IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)
S&P 500 portfolio of dog shares (Dog shares barking back, 8 January 2013)
Air Partner (A share ready to take off, 7 January 2012)
FTSE 100 traded options strategy (Highly profitable options, 3 January 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments (Rampant bargain shares, 31 December 2012)
