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OPINION

Cash-rich and undervalued

Cash-rich and undervalued
October 22, 2014
Cash-rich and undervalued
141p

Despite enjoying an enviable track record, and as has been the case for some time, the shares are priced on a large discount to book value even though the company is cash-rich following the part-disposal of its stake in global insurance broker Hyperion. At the end of July 2014, net cash and investments in treasury accounted for £12.4m - equivalent to 42.5p a share - of B.P. Marsh's net asset value of £59.8m, or almost a third of its market value of £39.4m.

This means that we are getting a free ride on investments worth almost £20m, which include a 2.5 per cent equity stake in Hyperion worth £7.3m. In addition, B.P. Marsh has a loan of £6m outstanding to Hyperion earning annual interest of £450,000 and due for repayment in two years' time, or earlier if there is an IPO. In total the carrying value of the loan to Hyperion and the 2.5 per cent equity stake accounts for £13.3m of B.P. Marsh's net asset value. That's the equivalent of 45.5p a share.

In other words, cash on the balance sheet and the equity investment in Hyperion, on which General Atlantic has a call option to purchase by July 2016, account for 88p a share of B.P. Marsh's net asset value of 205p, and around two-thirds of its current share price. I can see no reason at all why these assets should be valued at anything other than book value. From my lens at least, this means that all B.P. Marsh's other investments, worth 117p a share, are being attributed a value of 47p in the company's share price!

A share price discount of that magnitude seems excessive to me, given that a further £10.9m of the company's assets are loans and receivables made to portfolio companies. In the past six months, B.P. Marsh generated income of £892,000 on its loans to investees and for good measure also received £189,000 of dividends, too. Importantly, this income stream more than covered operating expenses of £929,000 in the half year to end July.

It also meant that a £1.5m unrealised gain on the equity investment portfolio, worth £32.3m, combined with net finance income of £206,000 and fees earned of £283,000, resulted in a £500,000 uplift in half-year pre-tax profits to £2.1m.

 

Investments with potential

In my opinion, the share price discount to book value is even more anomalous when you consider that B.P. Marsh has been sensibly using the proceeds from selling down its stake in Hyperion while maintaining a decent balance of portfolio companies.

After the half-year end, the company made a £1.6m investment in Nexus Underwriting, one of the largest independent speciality Managing General Agencies (MGA) in the London market. It looks a sensible deal as B.P. Marsh acquired a 5 per cent stake in a business that is expected to report profits of around £3m this year from commission income of £13m. Nexus generates its income through two operating subsidiaries: Nexus Underwriting, which underwrites speciality insurance products (Directors & Officers, Professional Indemnity, Financial Institutions and Accident & Health); and Nexus CIFS, which covers trade credit insurance.

B.P. Marsh's shareholding in Sydney-based MB Group, a managing general agent and a market leader in prestige motor insurance in Australia, is paying dividends quite literally. In fact, B.P. Marsh received a dividend of Aus$200,000 (£110,000) in the six-month period. That's a very decent return on the company's 40 per cent stake, which is in the books for £1.2m.

I understand that five new investments are currently being looked at, of which two could complete by the January financial year-end to use up around £4m of the company's cash pile. There could be a major disposal of a portfolio company in the next six months too.

 

Buy backs boost NAV per share

It's hardly surprising then that B.P. Marsh has been buying back its own shares given that they are priced so far below book value. Admittedly, the company has only purchased 12,000 shares in four transactions, but it's a start and you can expect further buybacks if the share price discount to book value widens too far, according to chairman Brian Marsh. In effect, this puts a floor under the share price.

Shareholders can also expect a decent income stream as the board has committed to paying out a final payout of at least 2.75p a share for the financial years ending 31 January 2015 and 2016, so there is a useful 2 per cent dividend, too.

The combination of continued net asset growth, a decent income stream and share buybacks partly explains why the shares have held up so well. In fact, they are up 7 per cent since I last updated the investment case ('Cash-rich small-cap buy', 19 August 2014), during which time the FTSE Aim index has fallen 9 per cent. However, I still believe that a 31 per cent discount to book value is far too harsh and fair value lies nearer to 170p. Offering medium-term upside, I maintain my positive stance. Buy.

Please note that I have written two other columns today, both of which are available on my IC homepage...

I have also written three articles in the past week on financial markets:

Equities: Eurozone growth scare spooks investors (13 October 2014)

Monetary policy: Normalisation is coming so plan ahead (17 October 2014)

Bond markets: Lessons to learn from bond market flash crash (17 October 2014)

  

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'