Last autumn, Gresham House acquired Aitchesse, an asset manager focused on forestry and timber assets that was founded in 2002 by its chairman Digby Guy. Aitchesse has increased assets under management five-fold to around £200m since 2007, helped by a favourable market for commercial forestry. The business earns annual management fee income of around £1.5m and one-off transaction fee income of 2 per cent on deals.
Gresham House has wasted no time either on leveraging the expertise of the Aitchesse team by launching a new forestry fund, having acquired a £12.1m portfolio, and is now marketing the new fund to institutional, family office and professional investors. It’s going well and not surprisingly given the strong historic returns generated from this asset class and the lucrative tax advantages in the UK. Namely, all income from timber sales is tax-free, investment gains are free from capital gains tax, and after two years of ownership commercial forestry becomes inheritance tax exempt.
I understand from Mr Dalwood that Gresham House will earn a 1.5 per cent annual management fee on the new funds managed and typically a 2 per cent transaction fee too. In other words, the initial forestry portfolio worth £12.1m should earn the company year one fees in excess of £400,000, and possibly significantly more because although the company has a £25m target size for the fund, the cap is actually £40m if investor demand warrants it. If Gresham House is successful in building up its forestry funds, then Aitchesse could prove to be a star buy. Its management team are incentivised as half the £7m consideration on the Aitchesse deal is based on an earn-out dependent on the business delivering on a sliding scale cash profits in a range between £1.7m and £3.4m in the period from July 2015 to February 2018. It’s early days, but the acquisition is trading in line with the earn-out agreement. In the financial year to end June 2015, Aitchesse’s management fee income was £1.47m, it earned one-off transactions fees of about £800,000 and made pre-tax profits of £946,000, highlighting the scope for this to be a major profit centre.
Gresham House is also earning around £540,000 of annual management fee income from its mandate as investment adviser to Aim-traded investment company Gresham House Strategic (GHS:765p). The company is backing its advisers as it owns 19.3 per cent of the equity, a shareholding currently worth £5.9m. Interestingly, the directors of Gresham House Strategic have made modest purchases of shares in their company in the past week. It’s also one of my 2016 Bargain shares and I updated the investment case late last week, reiterating my buy stance (‘Bargain shares updates’, 12 April 2016).
The point being that as Gresham House recycles cash from the sale of legacy assets into the launch and acquisition of funds focused on alternative investment strategies, there is clear potential to develop a very profitable business here. Guidance from Mr Dalwood is to expect his company to turn profitable on a monthly basis in the first half of 2017.
Solid asset backing
It was the company’s balance sheet strength, and scope to develop a fund management business, that first attracted me in the first place.
For instance, agents Jones Lang LaSalle are currently marketing for sale the company's legacy property in Speke, Liverpool, known as Southern Gateway, a multi-let office and industrial complex, at £7.6m. It’s now fully let and is being offered on an initial yield of around 10 per cent. Mr Dalwood expects a sale this year, and with the benefit of a strong balance sheet can afford to hold out for the best price. The company is also due to receive £1.3m of deferred cash consideration from its interest in another one of its legacy investments, a private company that sold a former Royal Mail sorting office in Edinburgh to CALA Management last summer. This cash is expected to be received in June and December this year. Gresham House also has around £620,000 invested through loan notes and equity in a company that owns a 55-acre cemetery in Chislehurst in the London borough of Bromley.
In addition, it owns a five-acre site in Newton Le Willows, Merseyside that has been valued at £2.25m by Jones Lang LaSalle and which has retail planning permission. The property borders the 25.8-acre Newton Le Willows residential site which Gresham House sold to housebuilder Persimmon. Disposal of this legacy asset is likely to take place next year once the first phase of the new homes have been built and retailers can see the likely footfall for their outlets. Gresham House is owed almost £6m of cash consideration from the sale of the 25.8-acre site over the next three years, so to free up this cash and repay a £2.85m bank loan, the company has recently negotiated a £7m banking facility with Kleinwort Benson Bank secured against its property assets and the deferred consideration from Persimmon.
The bottom line is that Gresham House has rock solid asset backing through property assets worth almost £11m including the cash due from the Royal Mail sorting office in Edinburgh; deferred consideration from Persimmon of £5.9m and which is in effect being released through the Kleinwort Facility; Gresham House Strategic shares worth £5.9m; and investments in cemeteries worth £620,000. It also had net funds of £890,000 at the end of 2015. That leaves the growing asset management businesses significantly undervalued in my view.
Priced on a modest premium to end 2015 book value of 262p a share, I continue to rate Gresham House’s shares a bargain buy on a bid-offer spread of 310p to 315p.
