For the past six months the shares have been consolidating these bumper gains in a sideways share price move, having hit a record high of 150p in January. The fact that the sell-off has not been deep is encouraging and it opens up the possibility that a move into blue sky territory could be on the cards when B.P. Marsh releases its full-year results on 3 June. Interestingly, the 200-day moving average has now caught up with the share price and offers strong support, so the shares are not extended at all above their long-term trend line.
The fundamental case for investing also favours a move to new highs as the financial results for the 12 months to end January 2014 will highlight a massive cash windfall made from the sale of 80 per cent of B.P. Marsh’s stake in global insurance broker Hyperion Insurance Group to private equity company General Atlantic in a £29.2m deal. Allowing for redemption of director loans, the tax liability on the disposal and the payment by B.P. Marsh of a 1.25p a share dividend to its shareholders last August, the company currently has net cash of £8.5m, or the equivalent of 29p a share, available for investments. And that’s after spending £8m on investments in the past six months.
It’s well worth noting that the company retains a further £13.3m of equity and loans in Hyperion, worth 45p a share. General Atlantic also has a three-year call option expiring in July 2016 to purchase the balance of B.P. Marsh's stake in Hyperion for £7.3m, equivalent to 2.8 per cent of the issued share capital, when the company undertakes an initial public offering (IPO). Expect General Atlantic to exercise its option because at the exercise price Hyperion’s equity is being valued at £260m, a modest amount for a fast growing company that produced cash profits of £35.9m last year on revenues of £166m. Under certain conditions, there could be an additional £2.1m cash windfall for B.P. Marsh, worth almost 7p a share, if Hyperion undertakes an IPO by 8 July this year.
Combined, the holding in Hyperion and net cash on B.P. Marsh's balance sheet is worth a total of 74p a share of the company’s net asset value of 194p. In other words, the shares are not only priced on a deep 28 per cent discount to book value, but if Hyperion does IPO then over half B.P. Marsh’s share price would be backed by cash. In effect, this means once you strip out net cash and the stake in Hyperion, then all the company’s other investments are currently being attributed a value of just 68p in B.P. Marsh’s share price even though they have an aggregate book value of 120p. A share price discount of 44 per cent is not just anomalous, but is unwarranted given B.P. Marsh’s track record of generating a compound annual growth rate on its investment portfolio of 11.7 per cent since 1990.
A portfolio with potential
It's also worth pointing out that the revaluation of the equity portfolio at the half-year-end, excluding the investment in Hyperion, produced a 5.3 per cent increase in net asset value. And these investments are not that illiquid either as the portfolio includes a £1.35m stake in Randall & Quilter (RQIH: 140p), a specialist in managing the run-off of insurance companies and Lloyd's of London syndicates that have stopped underwriting new contracts, but have already settled liabilities arising from policies written. True, I advised banking a 64 per cent profit on these shares last month, having included them in my 2013 Bargain Share Portfolio, but they are starting to look interesting again. The dividend yield is more than decent at 5.9 per cent and having fallen sharply on profit taking the shares are now modestly priced on a little over book value of 138p.
B.P. Marsh has been recycling the cash from the Hyperion share sale into follow on investments in its portfolio as well as new ones too. For instance, the company acquired a further 12 per cent stake in LEBC, an Independent Financial Advisory firm providing financial advice to individuals, blue chip corporations and partnerships. LEBC is a growing specialist financial services company, operating eleven branches across the UK with funds under influence around £2bn, generating annual turnover in excess of £10m and profit before tax of £543,000 in the last financial year. The £1m investment takes B.P. Marsh’s stake to 34.9 per cent and the company has also provided LEBC's Employee Benefit Trust with £1m of funding via a secured short term loan facility (repayable within 12 months) to enable the management team to increase their shareholding in LEBC.
Other new shareholdings in the portfolio include a A$800,000 (£444,000) investment for a 40 per cent stake in Sydney-based MB Group, a managing general agent and a market leader in prestige motor insurance in Australia. B.P. Marsh is also providing loan funding of A$1.4m to develop MB Group's market position by delivery of new products and Dan Topping, a director of B.P. Marsh, joins the board. MB Group made operating profits of A$930,000 on a margin of 39 per cent of revenues last year, so the acquisition looks sensibly priced.
B.P. Marsh's investment in Sterling Insurance looks interesting, too. Sterling is an Australian specialist underwriting agency offering a range of insurance solutions within the liability sector, specialising in niche markets including mining, construction and demolition. B.P. Marsh made a £1.95m investment last summer in return for a 19.7 per cent equity stake through a joint venture company. This shareholding is currently in the books at £2.15m, a valuation that's in line with the price Steadfast Group paid for a 39.5 per cent shareholding in Sterling. Steadfast is Australia's largest network of insurance brokers, with more than 430 offices across Australia and New Zealand, and annually generates around A$4.1bn (£2.5bn) in insurance sales, so is a major player. It's easy to see why Steadfast is interested as Sterling is already very profitable, having reported a 140 per cent rise in operating profits to A$1.2m on revenues that more than doubled to A$5.8m last year.
Other noteworthy investments in B.P. Marsh's investment portfolio include a 36.7 per cent stake worth £5.9m in Besso Insurance, a profitable insurance broker in the North American wholesale market. B.P. Marsh has invested a total of £2.6m since making its initial investment in Besso in 1995. The value of B.P. Marsh's investment rose by £675,000, representing an uplift of 13 per cent, in the first half of last year. Besso reported an operating profit of £1.1m in 2012, on revenue up 8 per cent to £26.2m. There should be further upside too because Besso is planning to move into new territories, including Brazil.
Unwarranted discount to book value
It’s worth noting that having paid a 1.25p a share dividend last August, B.P. Marsh has announced a 2.75p payout for the year ended 31 January 2014. The shares go ex-dividend on 25 June and the payment date is 25 July. It’s worth noting that “the board intend to maintain at least this level of dividend for the years ending 31st January 2015 and 31st January 2016, subject to ongoing review”. This means there is a decent enough two per cent dividend yield on offer.
There is also a reasonable prospect of further capital growth given B.P. Marsh’s shares are priced on a significant discount to book value. Moreover, with the forthcoming results in early June likely to make a very good read, and the IPO of Hyperion set to release even more cash for B.P. Marsh, then I have no hesitation maintaining my positive stance. I believe my share price target of 160p is not only reasonable, but in time could prove conservative too. On a bid offer spread of 137p to 142p, the shares rate a buy.
Please note I published two columns yesterday: 'Shining bright' and 'Time to sell'. I am currently working my way through a very large number of announcements from companies on my watchlist including: LMS Capital (LMS), Eros (NYSE: EROS), First Property (FPO) and Pure Wafer (PUR). I will also be updating my recommendations on Moss Bros (MOSB), IQE (IQE) and GLI Finance (GLI) after these three companies report financial results on Wednesday, 26 March.
