The performance of BP Marsh's 37.9 per cent holding in Besso Insurance Group, a top 20 independent Lloyd's broking group, was a key driver behind this uplift. The stake was re-valued by a further £3m to £13.9m and has almost doubled in value since January 2014. The investment now accounts for over 21 per cent of BP Marsh's net assets value of £65.5m and a quarter of its equity portfolio of £44.5m. Furthermore, the holding still doesn't look fully valued either as Besso is forecast to grow cash profits by 30 per cent to £4.8m in fiscal 2015 based on a 19 per cent rise in revenues to £37m. On this basis, Besso's equity is being valued at £36.6m, or the equivalent of 7.6 times forecast cash profits.
To put this implied valuation into some perspective, 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, earlier this year for the sale of a majority share in the business valuing it at around £53m, or 10 times cash profits. Attributing a similar cash profit multiple to Besso's forecast earnings for fiscal 2015 would give rise to another sharp valuation gain to BP Marsh's stake in its full-year results. That's worth noting as Besso is now BP Marsh's largest holding.
Key drivers for further valuation gains
The other key factor behind the solid investment performance was the performance of LEBC, an independent financial advisory firm. Operating from 15 branches across the UK, LEBC continues to perform strongly in the post Retail Distribution Review (RDR) environment. BP Marsh's 34.9 per cent stake in LEBC was revalued upwards by 21 per cent to £8.4m and now account for 13 per cent of the company's net asset value. The revaluation is fully warranted too as LEBC reported a 43 per cent increase in pre-tax profits to £1.1m on revenues up by 9 per cent to £12.3m in the fiscal year to end September 2014 and profits for the fiscal year just ended will be "significantly ahead again." This leaves scope for further valuation uplifts in BP Marsh's full-year results.
The good news story doesn't end there either as BP Marsh's 9.8 per cent stake in Nexus Underwriting has been marked up by almost 16 per cent to £3.6m. Tim Coles, previously the boss of highly regarded Howden Broking Group, was appointed as chief executive last month with the aim of developing Nexus into a business capable of writing $250m (£162m) of profitable speciality business within three years, up from $85m in 2014. It's a sound appointment and Nexus's board has been beefed up further following the appointment of Jeremy Adams, the former boss of Novae Group's Lloyd's managing agency, as a non-executive director. BP Marsh took a 5 per cent stake in Nexus in August 2014 and subsequently increased its holding to 9.8 per cent in June 2015. I understand from BP Marsh's chairman Brian Marsh that his company would like to raise its equity stake in Nexus even further to between 15 to 25 per cent, and this has been signalled to Nexus's board. It makes sense to do so given Nexus has a well regarded management team worth following at this early stage.
Of course, not all the company's investments performed as well, but there were mitigating circumstances. For instance, half the valuation declines in Sterling Insurance, an Australian specialist underwriting agency, and Summa Insurance Brokerage, a Madrid-based regional insurance broking firm, were down to sterling's appreciation against the Australian dollar and euro, respectively. Combined these holdings account for £5.8m, or 8.5 per cent of BP Marsh's net assets. In any case, with the Spanish economy now recovering, this improves prospects for Summa which I hasten to add has remained profitable throughout the recession years. Mr Marsh is relatively unconcerned about Sterling Insurance too. That company's business model is sound.
Funds available for follow-on investments
Importantly, BP Marsh still has funds available to add to its investments. Cash balances stood at £6m at the end of June and the board currently has £3.2m of uncommitted funds available. In addition, 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. It's a certainty that the option will be exercised by its July 2016 expiry date given that this year's merger of Hyperion with RK Harrison has been value accretive. The cash pile could even swell before then if one potential divestment is made, but the main aim is to increase the book of investments from 14 to 20 holdings over the course of the next three to five years.
I would point out that BP Marsh has a loan outstanding of £6m made to Hyperion which earns annual interest of £450,000 and is due for repayment in October 2017. This means that the carrying value of the loan and equity stake in Hyperion, and the combined equity stakes in Besso, Nexus and LEBC account for £39.2m, or 60 per cent of BP Marsh's net asset value of £65.5m. The company also owns a 1.3 per cent stake with an open market value of just shy of £1m in Aim-traded Randall & Quilter (RQIH:100p), a specialist management service provider and acquirer of solvent insurance companies in run-off.
That's rock solid asset backing and makes the current 30 per cent plus share price discount to net asset value far too deep for a company that has posted compound annual growth of 11.2 per cent in net assets over the past 25 years.
Dividend hiked
The ongoing capital gains being posted on the portfolio aside, the board plans to hike the payout per share from 2.75p to 3.42p in the current fiscal year and pay at least this level of dividend in the following financial year too. This means BP Marsh's shares offer a prospective dividend yield of 2.2 per cent. I would also anticipate further net asset value per share accretive buy backs to narrow the deep share price discount to book value.
So with BP Marsh increasing its net asset value to a record high, raising its dividend, and with valuations on its equity portfolio likely to rise yet again in the second half, then I believe the shares offer a compelling investment opportunity, so much so that my fair valuation of 180p a share is starting to look too conservative. Offering 16 per cent upside to my conservative fair value of 180p a share, I continue to rate BP Marsh's shares a decent buy on a bid-offer spread of 152p to 155p.
Please note that I initiated coverage on the shares at 88p ('Hyper value small-cap buy', 22 January 2012), so including dividends of 7.75p a share the holding is showing a total return of 85 per cent. I have remained positive ever since then and last reviewed the investment case when the price was 145p ('Four small caps with further to go', 13 September 2015).
MORE FROM SIMON THOMPSON...
I have published articles on the following 46 companies in the past month:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initital target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 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'
