Investments with potential
The performance was underpinned by an eye-catching 15.5 per cent like-for-like valuation uplift in the company's equity portfolio which rose in value from £33.5m to £38.6m in the 12-month period, accounting for 61 per cent of net asset value of £63m. Importantly, there are sound reasons to believe this stellar progress will continue.
Indeed, three quarters of the revaluation increase came from BP Marsh's 37.9 per cent holding in Besso Insurance Group, an independent Lloyd's broking group, reflecting a surge in profits in that business. The holding is now in BP Marsh's books for £10.9m - up from £7.2m at the end of January 2014, implying a valuation of £28.7m for Besso as a whole.
Highly regarded for the quality and experience of its specialist teams, Besso works primarily with overseas brokers and intermediaries, and places most of its business under binding authorities with Lloyd's syndicates. It's clearly doing well, which will become apparent when Besso releases its fiscal 2014 results shortly, hence the sharp valuation upgrade in BP Marsh's accounts. But there could be further gains to come from this holding, too.
That's because late last week, and well after BP Marsh's financial year-end, Robert Fleming Insurance Brokers, the international Lloyd's insurance and reinsurance broker, agreed terms with Calera Capital, a private investment firm with offices in San Francisco and Boston, for the sale of a majority share in the business valuing it at around £53m, or 10 times cash profits. Attributing the same cash profit multiple to Besso's earnings would undoubtedly give an even higher valuation for BP Marsh's stake. The Besso holding accounts for 17 per cent of BP Marsh's book value of £62.9m, so is a significant investment.
Balanced portfolio for growth
There were also noteworthy valuation increases from another two of the company's 13 investee companies: Spanish insurance broker Summa and LEBC, an independent financial advisory firm. Operating from 14 branches across the UK, LEBC continues to perform strongly in the post Retail Distribution Review (RDR) environment, posting a 43 per cent increase in full-year pre-tax profits to £1.1m on revenues ahead by 9 per cent to £12.3m. This prompted a 23 per cent upgrade in the valuation of BP Marsh's 34.9 per cent stake in LEBC, giving the holding a book value of almost £7m.
Moreover, with the "momentum continuing into 2015", we could see another step change in LEBC's profits this year. In turn, that leaves scope for a further uplift in the £20m valuation attributed to LEBC's equity especially once you consider that listed rival Mattioli Woods (MTW: 515p) is being valued on 18.5 times its likely post tax earnings for the financial year to end May 2016.
BP Marsh also pulled off a smart looking deal when it bought out a 28.4 per cent stake from a non-core third-party shareholder in Summa Insurance for a bargain basement £1m at the tail end of this year. This raised its stake in Summa to 77.2 per cent. The company normally invests up to £3m in individual investee companies in return for a stake between 15 per cent to 45 per cent, but this was an opportunity not to be missed and BP Marsh booked a paper gain of £692,000 on its raised shareholding. This investment is now in the company's books for £4.3m, and values Summa's whole equity at £5.6m, or a very reasonable 6.5 times last year's cash profits. Summa's operational performance in 2015 has been encouraging, and with Spain one of the fastest growing economies in the eurozone last year, the company looks well positioned to prosper in a stabilising market.
BP Marsh still retains a 1.6 per cent equity stake in global insurance broker Hyperion Insurance worth £7.3m and which is subject to a call option from General Atlantic. Expect that option to be exercised by the July 2016 expiry date especially as the merger of Hyperion with RK Harrison in April this year will have been value accretive and Hyperion has been growing strongly, too. In addition, BP Marsh has a loan of £6m outstanding to Hyperion earning annual interest of £450,000 and due for repayment in 14 months, or earlier if there is an IPO. In total the carrying value of the loan to Hyperion and the equity stake accounts for £13.3m, or 45.5p a share, of BP Marsh's net asset value of £63m. That's solid asset backing and, offfering a steady income stream in the interim, BP Marsh can afford to wait until next summer to release this capital for investments elsewhere.
Deep discount to sum-of-the-parts valuation
By my calculation, BP Marsh's shareholding in and loan to Hyperion, and its equity stakes in LEBC, Summa and Besso, are in the books for a combined £35.5m, or 122p a share. That leaves other equity investments and loans made to nine other investee companies, worth 94p, in effect in BP Marsh's share price for a bargain basement 28p. That's anomalous when you consider that BP Marsh has loans and receivables on its balance sheet, excluding the Hyperion loan, worth a total of £8.7m, or 30p a share on its balance.
Or put it another way, with the company's shares trading on a bid-offer spread of 145p to 150p, a chunky 30.5 per cent discount to book value, all of the share price is covered by the stakes in the four companies mentioned above and those loans and receivables. That leaves equity stakes in a further nine companies worth a total of £9.1m, or 31p a share, and a cash pile of £7.8m, worth 27p a share, in the price for free.
Cash rich and undervalued
It's not as if the company is draining cash either: annual operating expenses of £2.16m were covered over 1.3 times over by income of £2.8m earned from the aforementioned investments and net finance income of £155,000. This means that excluding the £5.1m unrealised gains on the company's equity portfolio, recurring pre-tax profits of £800,000 easily covered the cost of the 2.75p a share dividend. The company has also been buying back shares whenever the board feel the share price discount to book value becomes too large, thus putting a floor under the share price. That's a sensible strategy to pursue and one that is set to continue.
For good measure the share price now looks poised to take out the all-time high of 155p from a year ago, so the technical set-up is encouraging. In the circumstances, I have every reason to believe that my target price of 170p will be achieved as I outlined in my last article when the price was 135p ('Income stocks with capital upside', 18 February 2015). In fact, I feel confident enough to raise my target price to a new range between 170p to 180p.
Please note that I initiated coverage on the shares when they were priced at 88p ('Hyper value small-cap buy', 22 January 2012), since when they have risen by 70 per cent during which time the FTSE Aim index has risen by only 2 per cent.
A chic performance
Clothing retailer Moss Bros (MOSB: 110p) has reported a robust trading performance in the first 15 weeks of its new financial year. Buoyed by a 7.6 per cent rise in its underlying retail sales, the company is maintaining the stellar growth seen in the financial year to end January 2015. This has been helped by the early clearance of winter stock and the timely switch into full price new season ranges, a smart move given the relatively mild winter.
The re-launch of own brand lines, and focused marketing to a younger audience have clearly helped as has investment in digital platforms: e-commerce sales shot up by almost two-thirds year on year and now account for 10 per cent of the total. Importantly, customer retention rates are improving, too, highlighting customer satisfaction with the product offering.
Another key take for me in the trading update was the 6 per cent-plus rise in like-for-like sales in the company's hire division, reversing a disappointing performance in the previous two financial years and one that is being underpinned by encouraging trends in the company's wedding hire business. The recovery in bookings has also been aided by the launch of new ranges including lounge suits. Interestingly, gross margin is running in excess of 80 per cent in this division which means if the rate of progress is maintained, then there is potential for upgrades as the year progresses according to analyst John Stevenson at brokerage Peel Hunt.
Accelerated store expansion boosting sales
Moss Bros' board also confirmed that its accelerated refurbishment programme remains bang on track with 11 stores refurbished so far this year and a further 16 outlets to be spruced up by the end of January 2016. This should mean around 85 of the 128 stores will be operating in the new format by then. Admittedly, it comes at a cost - capital expenditure will rise by three quarters to £14m in the current financial year - but it certainly makes sense given that the new stores deliver a hefty boost to underlying sales and the cash pay-back period is only three years.
Post the update, Mr Stevenson is maintaining his prediction that Moss Bros will be able to lift current year sales by just over £10m to £125m to deliver a 20 per cent rise in cash profits to £12.1m and lift pre-tax profits by around a quarter to £5.7m. On this basis, expect EPS of 4.4p, up from 3.6p last year, and a raised dividend per share of 5.4p. That dividend is uncovered by earnings, but not by operating cash flow as Moss Bros has the benefit of a substantial non-cash depreciation and amortisation charge which subdues the IFRS pre-tax profit line, but not cash generation which is being recycled into new store refits and dividends to shareholders. It's worth pointing out, too, that the company still has a cash rich balance sheet, with net funds accounting for a fifth of the share price.
Break-out looming
So offering a prospective dividend yield of 5.5 per cent, and trading on 6.5 times current year cash profit estimates after stripping out net cash on the balance sheet, I have no reason to change my positive stance on the shares and maintain a fair valuation in the range 120p to 130p. In fact, with the share price poised to take out the 110p high from late March, a swing buy and point and figure buy signal could be on the cards. It's one well worth following in my view with potentially 18 per cent upside on the table.
Please note that I first advised buying Moss Bros' shares at 39p ('Dressed for success', 20 February 2012), and last updated the investment case around the current price post the annual results in March ('Suitable investments for growth', 26 March 2015). Buy.
Admitting defeat
Aim-traded shares of SeaEnergy (SEA: 15.5p) have had a rollercoaster ride since I recommended buying at 29p ('Making waves', 20 February 2014), hitting a high of 44p at one stage, but they have been a victim of the falling oil price since the autumn.
For the past six months the share price performance appeared to be completely at odds with the operational progress SeaEnergy has been making. The company reported a record year for its highly profitable R2S's core service division in 2014, buoyed by demand from the energy sector for its Visual Asset Management technology that enables oil rig operators to keep a visual record of all key parts of an oil rig, monitor its condition and changes to the fabric, with a view to carrying out maintenance.
But the oil price slump has caught up with the company as it warned yesterday of project deferrals due to oil companies implementing budget freezes. As a result management guidance is that R2S's revenues this year will be marginally below that achieved in 2014, prompting analyst Ken Rumph at brokerage Stifel to cut his fiscal 2015 revenue estimate for R2S by 30 per cent to £3.7m, or 11 per cent below the £4.1m of turnover the business unit generated in 2014. On this basis, R2S is now expected to report operating profit of £1.85m, down by almost £1m from Mr Rumph’s previous estimate, and well down on the £2.1m profit the unit earned in 2014. Add to this small contributions from both SeaEnergy's marina and consulting divisions, and factor in central overheads of around £2m, and the company only looks like breaking even in 2015, rather than delivering the six-fold rise in pre-tax profit to £1m that Stifel had predicted when I updated the investment case when the shares were 21p ('Profiting from M&A', 13 April 2015).
This means that although there is value in the shares, as I have made the case for in the past, the risk to earnings now looks to the downside. Moreover, the fall in the share price of Aim-traded North Celtic Sea-focused oil and gas explorer Lansdowne Oil & Gas (LOGP: 5p), a company in which SeaEnergy owns a 18 per cent legacy stake, worth £1.5m, means that SeaEnergy will have to book a non-cash asset impairment charge on this holding of almost £1.5m given that Lansdowne's share price has virtually halved since the start of the year. This is hardly good news for sentiment either.
Binary option
Lansdowne's latest share price weakness reflects the delays in closing a farm-out deal on the Barryroe licence in the North Celtic Sea Basin which has 346m barrels of oil equivalent of recoverable 2C resources. Aim-traded Providence Resources (PVR: 23p) is the operator of the licence with an 80 per cent interest in the field and has been negotiating on behalf of Lansdowne which has a 20 per cent interest in Barryroe. A farm-out partner has been found, but the closing conditions have yet to be satisfied and disconcertingly Providence is now seeking to clarify the status of those conditions and the proposed farm-in partner's position. Lansdowne has also instigated a strategic review of its own businesses.
It's a binary bet as a successful farm-out would enable SeaEnergy to exit this legacy holding, but if the deal falls apart then expect Lansdowne's share price to fall further and SeaEnergy to be forced to write-down its investment even further. Having assessed comments from all the parties involved, I am no longer confident that a farm-out can be agreed.
That's not to say there isn't value in SeaEnergy's shares as ascribing a valuation of 10 times current year operating profit estimates to R2S as a standalone entity implies a valuation for that business alone around double SeaEnergy’s depressed market value of £9m. As I have made the point before, the company’s North Sea and Bulgarian royalty interests have some value, too - Mr Rumph at Stifel believes these are worth about £1.8m, a sum equivalent to 3p per SeaEnergy share or a fifth of the company’s current share price.
But it could take time for this value to be recognised and investors have clearly lost faith both in the ability of Providence Resources to pull off a farm-out on Barryroe, and of R2S to buck the spending cuts being implemented by oil companies. That explains why SeaEnergy's shares fell by a quarter, through the 21p support level, after the profit warning. In the circumstances, I feel it's prudent to cut your losses too. Sell.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all the share recommendations I have made this year. Since then I have published articles on the following 27 companies:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Break-out looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a break-out', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 June 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p (‘Hitting target prices’, 2 June 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
