Indeed, a pre-close trading statement for the financial year to end January 2016 included several positive trading updates from the leading investee companies which account for the majority of its portfolio by value. This suggests yet another rise in the company’s net asset value per share following a 9.3 per cent rise in its equity portfolio at the half-year stage which sent its net asset value per share surging from 205p to 225p. This means that at the current price the shares are rated on a deep 30 per cent discount to book value.
In my opinion, such a deep discount is completely unwarranted for a number of reasons. Firstly, the company was sitting on £3.6m of net cash on its balance sheet at the end of January 2016 after factoring in commitments to its existing portfolio, and that cash pile is set to get a major boost this summer. That’s because the company sold 80 per cent of its shareholding in privately owned global insurance broker Hyperion Insurance in July 2013, but retained a 1.6 per cent equity stake, worth £7.3m, subject to a call option from General Atlantic. It's a racing certainty that the option will be exercised by its July 2016 expiry date given that last year's merger of Hyperion with RK Harrison has been hugely value accretive.
In addition, 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, or sooner if Hyperion goes down the route of an IPO. This means that the carrying value of the loan and equity stake in Hyperion, and spare cash on BP Marsh’s balance sheet, are worth a combined £16.9m, or 58p a share.
Prospects of hefty revaluations of investee companies
In addition, I feel there is a real possibility that BP Marsh's 37.9 per cent holding in Besso Insurance Group, a top 20 independent Lloyd's broking group, could see another significant uplift in the forthcoming accounts, having been revalued by 27 per cent to £13.9m in the July half year results. This means the holding accounts for more than a fifth of BP Marsh's last reported net asset value of £65.5m.
Furthermore, the holding still looks woefully undervalued as Besso was forecast to grow cash profits by 30 per cent to £4.8m in its 2015 financial year, and I understand guidance is that cash profits will be in excess of £6m in 2016. This means that the £13.9m value attributed to BP Marsh’s 37.9 per cent stake in effect values Besso’s equity at only £36.6m, or six times this year’s forecast cash profits.
To put the scale of the undervaluation into perspective, Robert Fleming Insurance Brokers, the international Lloyd's insurance and reinsurance broker, sold a majority share in its business to private investment firm Calera Capital, valuing its equity at £53m, or 10 times cash profits. Attributing a similar cash profit multiple to Besso's forecast earnings for fiscal 2015 would give rise to a huge valuation gain to BP Marsh's stake in its full-year results. Besso is by far BP Marsh's largest holding, something well worth noting in light of the raised profit guidance.
And the good news doesn’t end there either as BP Marsh also owns a 34.9 per cent stake in LEBC, an independent financial advisory firm that has been making hay in the post Retail Distribution Review (RDR) environment. The shareholding was last valued at £8.4m to account for 13 per cent of the company's net asset value. However, I have found out that LEBC’s pre-tax profits for the financial year to end September 2015 have soared from £1.1m to £1.8m, driven by a 22 per cent rise in revenues to £15m. The implied value of LEBC’s equity is only £24m based on the valuation in BP Marsh’s last accounts, hardly an exacting valuation for a business growing so rapidly and clearly prospering in the post RDR world. I would expect another hefty uplift on the value of this stake in BP Marsh’s forthcoming results.
If the news on Hyperion, Besso and LEBC was not compelling enough, then it’s also worth considering BP Marsh's investment in Nexus Underwriting, an independent specialty Managing General Agency, founded in 2008. Tim Coles, previously the boss of highly regarded Howden Broking Group, was appointed as chief executive almost six months ago with the mandate of developing Nexus into a business capable of writing $250m (£162m) of profitable speciality business within three years. He’s moving the business in the right direction as premium income is forecast to rise from $85m in 2014 to $110m in 2016. Having taken a 5 per cent stake in Nexus in August 2014, and raised its holding to 9.8 per cent in June 2015, BP Marsh has since raised its stake further to 13.7 per cent at a cost of £1.47m, implying the shareholding is worth at least £5.1m, or 11 per cent ahead of the aggregate price paid.
Unwarranted valuation
So, by my reckoning the shareholdings in Besso, LEBC and Nexus, all of which will realistically be raised in value in BP Marsh’s next set of accounts, currently have a book value of £27.4m, a sum equating to 94p a share. Add to this the loan and equity stake in Hyperion, and cash on BP Marsh’s balance sheet which are worth a combined £16.9m, or 58p a share, and this means that the share price is backed by these investments alone. That leaves holdings in a further 10 companies, worth almost half the share price, in the price for nothing. And that includes a 1.32 per cent stake in Aim-traded Randall & Quilter (RQIH: 81p), a specialist management service provider and acquirer of solvent insurance companies in run-off, worth £800,000.
In my view, that represents rock solid asset backing and makes the 30 per cent plus share price discount to net asset value anomalous for a company that has posted compound annual growth of 11 per cent in its net assets since 1990. There is a decent dividend too as the board have declared that they will raise the payout from 2.75p to 3.42p a share in the forthcoming full-year results, implying that BP Marsh's shares offer a prospective dividend yield of 2.1 per cent.
They have also been sensibly using the company’s cash rich balance sheet to make net asset value accretive buy backs to narrow the share price discount to book value. This also acts as a floor to the share price as investors can take comfort from the fact that every time the discount widens too far, the company will step into the open market and repurchase shares.
New target price
In these uncertain times, BP Marsh offers a compelling investment opportunity in my view. Not only is there a huge ‘margin of safety’ given the unwarranted 30 per cent share price discount to net asset value, but there is also a very realistic chance that there will be sizeable valuation uplifts in the aforementioned investee companies at the time of the next results on 7 June 2016. I would also flag up that there is scope for further corporate activity in the insurance market this year too.
Needless to say, offering 21 per cent potential upside to my conservative upgrade target price of 190p a share, I continue to rate BP Marsh's shares a decent buy on a bid-offer spread of 154p to 157p.
Please note that BP Marsh’s shares have risen by 79 per cent in value since I initiated coverage at 88p ('Hyper value small-cap buy', 22 January 2012), during which time the FTSE Aim index has fallen by 10 per cent. The company has also paid out dividends of 7.75p a share.
MORE FROM SIMON THOMPSON...
I have written articles on the following 62 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ 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
