Since then the company has made a huge cash windfall from the sale of 80 per cent of its stake in global insurance broker Hyperion Insurance Group to private equity company General Atlantic in a £29.2m deal. Allowing for redemption of director loans, the tax liability on the disposal and the payment by BP Marsh of a 1.25p a share dividend to its shareholders in August, BP Marsh now has £16.5m of net cash available. That's the equivalent of 56p a share.
The company also retains a further £13.3m of equity and loans in Hyperion, worth 45p a share. Moreover, General Atlantic has a call option to purchase the balance of BP Marsh's stake in Hyperion for £7.3m, equivalent to 2.81 per cent of the issued share capital, when the company undertakes an initial public offering (IPO). Under certain conditions, there could be a further £2m cash payout for BP Marsh, worth almost 7p a share, if Hyperion undertakes an IPO by the end of July.
In other words, the holding in Hyperion and net cash on the balance sheet is currently worth a total of 101p a share of BP Marsh's net asset value of 195p and accounts for 70 per cent of its share price, with the possibility of another 7p a share windfall if the Hyperion IPO takes place before the end of July next year.
Investment portfolio with potential
Having made this large windfall gain from Hyperion, BP Marsh now plans to invest its £16.5m cash pile by taking minority equity stakes of between 15 per cent and 45 per cent in growth companies operating in the financial sector. In the latest six-month period, BP Marsh received 32 new prospective investments to mull over.
So, with a large cash pile at its disposal, it's worthwhile noting that the track record of BP Marsh's management team is decent enough as the company has generated a compound annual growth rate on its investment portfolio of 11.7 per cent since 1990. True, the majority of this return has been derived from the holding in Hyperion, a company BP Marsh co-founded in 1994. In fact, over the subsequent 18 years, the company has increased the value of its £4.35m investment in Hyperion to £41m, equating to an 840 per cent pre-tax return on invested capital.
But it's also worth pointing out that the revaluation of the ongoing equity portfolio at the end of July, excluding the investment in Hyperion, resulted in a 5.3 per cent increase in the net asset value in the six-month period. In total, the £14.7m initial investment made in nine other portfolio companies is currently valued at £20m, so although the returns are not as eye-watering as that on Hyperion, it's decent enough. Importantly, only one of the nine investments is showing a loss.
And some of these companies clearly have promise. For instance, the aforementioned £20m investment portfolio, excluding the £7.3m equity still held in Hyperion, includes a £1.2m stake in Randall & Quilter (RQIH: 170p), a specialist in managing the run-off of insurance companies and Lloyd's of London syndicates that have stopped underwriting new contracts, but have already settled liabilities arising from policies written. I included the high-yielding shares in my 2013 Bargain Share Portfolio, since when they have produced a 55 per cent total return in the past eight months. If you followed that advice, I would continue to run your profits.
BP Marsh's investment in Sterling Insurance looks a smart deal, too. Sterling is an Australian specialist underwriting agency offering a range of insurance solutions within the liability sector, specialising in niche markets including mining, construction and demolition. BP Marsh made a £1.95m investment in June this year for a 19.7 per cent equity stake through a joint venture company and is already showing a 20 per cent uplift on its invested capital. The holding is currently valued at £2.15m, a valuation that's in line with the price Steadfast Group paid for a 39.47 per cent shareholding in Sterling a few months ago. Steadfast is Australia's largest network of insurance brokers, with more than 430 offices across Australia and New Zealand, and annually generates around AU$4.1bn (£2.5bn) in insurance sales, so is a major player. It's easy to see why Steadfast is interested as Sterling is already very profitable, having reported a 140 per cent rise in operating profits to AUS$1.2m on revenues that more than doubled to AUS$5.8m last year.
Other major investments in BP Marsh's investment portfolio include a 36.7 per cent stake worth £5.9m in Besso Insurance, an insurance broker in the North American wholesale market. BP Marsh has invested a total of £2.6m since making its initial investment in Besso in 1995. The value of BP Marsh's investment increased by £675,000, representing an uplift of 13 per cent, in the reporting period after Besso reported an operating profit of £1.1m in 2012, on revenue up 8 per cent to £26.2m. And there should be further upside to come as Besso is looking at expansion into new territories, including Brazil in the coming year.
Unwarranted discount to book value
Admittedly, BP Marsh's shares have made decent headway since I first identified the valuation anomaly on offer when the price was around 90p last year. However, trading on a bid offer spread of 138p to 142p, the shares still trade on a 27 per cent discount to net asset value of 195p, even though over 100p of the share price is backed by net cash and the remaining investment in Hyperion, a company that is likely to IPO sometime next year, and possibly much sooner given the current IPO frenzy.
Hyperion is fast growing and increased underlying operating profits by a third to £17.3m on revenue up 41 per cent to £109m in the financial year to September 2012. A valuation of £260m for Hyperion's equity looks well underpinned and I am happy with the £13.3m carrying value of BP Marsh's investment.
BP Marsh's shares also offer a small yield of 0.9 per cent, so are on the radar of income funds. In my opinion, there should be potential for the payout to increase in the future, especially since BP Marsh "operates in a field of business that is inflation-proof and recession-proof", according to founder and chairman Brian Marsh. The company's board has also discussed the possibility of a tender offer and share buy-back programme to narrow the share price discount to net asset value, although for now Mr Marsh sees greater "mileage in investing in the field of business where the company has grown its net asset value by 11.7 per cent a year on average for over two decades".
I would agree and still believe my share price target of 160p is not unreasonable. Analyst Barrie Cornes at broker Panmure Gordon has a target price of 155p, having upgraded from his previous fair value price of 130p post these half-year results. So, offering a further 10 per cent to my target price, I am happy advising that you run the profits on this holding.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'. The book also includes a dedicated chapter on how I select my annual Bargain Shares Portfolio with case study analysis.
MORE FROM SIMON THOMPSON ONLINE....
I have published four other articles this week on the following seven companies:
■ Trifast ('A timely bolt on purchase', 21 Oct 2013)
■ Noble Investments ('Bargain shares update', 21 Oct 2013)
■ Stanley Gibbons ('Bargain shares update', 21 Oct 2013)
■ Cairn Energy ('Bargain shares update', 21 Oct 2013)
■ Eros ('Time for some price action' 22 October 2013)
■ PV Crystalox Solar ('Time for some price action' 22 October 2013)
■ Moss Bros ('New highs beckon', 23 October 2013)
