Aim-traded small-cap specialist finance provider GLI Finance (GLIF: 62.5p) has just reported a 5.5 per cent increase in its net asset value to 51p a share in the final three months of 2014, driven mainly by the company’s investments in peer-to-peer and small- and medium-sized enterprise (SME) lending platforms in the UK, Europe and the US. Indeed, it was the potential from these peer-to-peer investments, and a 5p-a-share annual dividend paid on a quarterly basis, that attracted me to the company a year ago when the price was 53.5p (‘Funded for growth’, 25 February 2014). In the intervening 12-month period the holding has generated a 26 per cent total return in a market down over 20 per cent.
It’s easy to see why investors are attracted by the current 8 per cent dividend yield and prospects for capital uplift from an interesting portfolio of SME investments. In the final quarter of 2014, GLI Finance completed investments in three new portfolio companies: UK Bond Network, the UK’s first peer-to-peer bond platform; Ovamba, the Africa-focused alternative finance platform; and Sancus, an offshore secured lending business targeting Channel Island-based entrepreneurs, SMEs, high-net-worth individuals and professionals. I commented on the Sancus deal in depth at the time of the announcement (‘Funded for growth’, 19 November 2014).
What’s interesting right now is that the company is exploring the possible flotation of an independent investment company to be managed by GLI with the aim of investing in a diversified portfolio of loans originated principally by the company's portfolio of lending businesses. The new fund would aim to provide investors with access to the fast expanding alternative finance market, leveraging GLI's unique position in terms of its experience, knowledge and day-to-day involvement in the alternative finance sector. The fund would target a high single-digit yield for investors, while providing GLI with further scalable origination capability. So not only is there potential capital upside from GLI Finance’s existing portfolio, but there could be a lucrative income stream from this new fund too if it gets off the ground. I understand broking house N+1 Singer has been appointed to work with GLI Finance on the new fund.
Fair Oaks fundraising
And the good news doesn’t end there either as GLI Finance still owns 34.3m shares in Fair Oaks Income Fund (FAIR: $1.025), a company to which GLI spun off two of its US collaterised loan obligations portfolios last year in order to focus on the SME and peer-to-peer lending markets. The end game here is ultimately a selldown of that stake, so it’s therefore worth flagging up that Fair Oaks announced yesterday that it has placed 40m new shares to raise $39.7m (£25.8m) with new and existing investors in order to take advantage of a strong pipeline of investment opportunities offering an attractive risk-return profile. This fundraising follows on from a $21m (£13.6m) commitment secured last week from a new investor, highlighting that GLI’s investment is likely to be readily realisable. The company’s shareholding in Fair Oaks accounts for 21 per cent of Fair Oaks’ enlarged issued share capital and, valued at £22.8m, equates to 25 per cent of GLI Finance’s net asset value of £88.2m.
It’s easy to see why Fair Oaks is proving an attractive home for institutional investors as the fund is currently generating an annualised dividend yield of 7.7 per cent. I expect a selldown in GLI Finance’s stake at some stage, but in the meantime the company is earning $2.64m (£1.74m) in annual dividends on its shareholding. That payout covers a fifth of GLI Finance’s annual 5p-a-share dividend to its own shareholders, a distribution the board is committed to making.
So with GLI making serious headway with its new investments, and a new fund launch possible, I feel that my target price of 80p – equating to 1.56 times current book value – is still a sensible objective. Trading on a bid-offer spread of 62p-62.5p, I continue to rate GLI finance shares’ an income buy ahead of the release of its fiscal 2014 results at the end of March, and its first-quarter results on 23 April. A move beyond January's high of 65p would not only represent a swing and point-and-figure buy signal, but should be acted upon in my view as it would also confirm that this year's sideways share price movement is over.
A solid value play
I have been perusing the financial results from Hyperion, a global insurance broker and a privately owned company that has just reported a 13.5 per cent rise in operating profits to £33.9m in the financial year to end-September 2014 on underlying revenues up 7 per cent to £195m. Those profits more than justify an equity valuation of £295m in my view. And the company is scaling up as it is merging with UK-based private insurance and reinsurance intermediary RK Harrison to create a group with almost 3,000 employees, operating in close to 40 countries. Hyperion’s board is in no hurry to take the company public just yet, but an IPO is still on the agenda. But when it ultimately happens doesn’t matter to me because what the latest financial results from Hyperion, and the proposed tie-up with RK Harrison, highlight is that the company is making solid progress.
That’s important because I have an interest in Hyperion through my buy recommendation in Aim-traded insurance sector investment company BP Marsh & Partners (BPM:135p), which holds a 2.47 per cent equity stake in the insurance broker worth £7.3m. Investor General Atlantic has a call option to purchase the balance of BP Marsh’s stake in Hyperion by July 2016 at that book value. BP Marsh also has a loan of £6m outstanding to Hyperion earning annual interest of £450,000 and is due for repayment on 3 October 2017, or earlier if there is an IPO. In total, the carrying value of the loan to Hyperion and the 2.47 per cent equity stake accounts for £13.3m of BP Marsh's net asset value of £59.8m. That's the equivalent of 45.5p a share, or a third of BP Marsh’s share price. Including dividend income earned from Hyperion, the investment is currently earning BP Marsh £506,000 a year so is generating a decent return ahead of a full realisation.
In addition, in a positive trading update yesterday, BP Marsh’s board reported that it currently has net funds of £5.7m available for new and follow-on investments, or the equivalent of 19.5p a share. In other words, the financial stake in Hyperion, and net cash on its balance sheet, account for 65p a share, or half of BP Marsh’s share price. That leaves other investments with a book value of 140p a share in effect being valued in BP Marsh’s share price at 73p, or little over half their book value. That’s a harsh valuation considering the progress being made by investee companies.
Solid portfolio
For instance, in yesterday’s trading update, BP Marsh revealed that LEBC, an independent financial advisory company providing services to individuals, companies and partnerships, principally in employee benefits, investment and life product areas, has just reported a 43 per cent rise in operating profit to £840,000 on revenues up 9 per cent to £12.3m. BP Marsh owns a 34.9 per cent shareholding in LEBC which was last valued at £6.2m.
I also understand that Nexus Underwriting, one of the largest independent speciality Managing General Agencies (MGA) in the London market, has performed well since BP Marsh invested £1.6m for a 5 per cent equity stake last summer. The business is expected to report profits of around £3m for last year based on commission income of £13m. Nexus generates its income by underwriting speciality insurance products and through trade credit insurance.
It’s worth noting too that BP Marsh actively considers new proposals to add to its investment portfolio of insurance-focused companies. It has a decent track record too, having increased its net assets at a compound annual growth rate of 11.3 per cent since 1990. And the board is ready to cash in its investments too as the Hyperion case highlights. In fact, when the company reported its interim results in late October (‘Cash rich and undervalued’, 22 October 2014), chairman Brian Marsh told the Investors Chronicle that there could be a major disposal of a portfolio company before BP Marsh releases its fiscal 2015 results in early June.
In the meantime, shareholders are being rewarded with a decent income stream: the board declared a dividend of 2.75p a share in 2014 and intends to maintain the payout “at least at this level” for the fiscal year just ended, and also for the current year ending 31 January 2016. In addition, the board has been buying the shares every time they dip down to around the 131p level, acquiring 63,000 shares in the past six months. The company releases its full-year results on 2 June 2015 and expects the share buy-back mandate to continue.
What this also means is that there is a buyer in the market ready to pick up the shares as soon as the discount to net asset value widens too far. That’s reassuring with the shares trading on a bid-offer spread of 131p-135p as in effect there is a floor just below the current share price. Needless to say, trading a third below the last reported net asset value of 205p, and with scope for another valuation uplift in the forthcoming results, I continue to rate BP Marsh shares a solid medium-term buy and maintain a target price of 170p.
Please note that I initiated coverage three years ago when BP Marsh’s share price was 88p (‘Hyper value small-cap buy’, 22 January 2012), during which time the shares have risen by 53 per cent and the FTSE Aim index has fallen by 8 per cent.
■ 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'
