I have had a results call this morning with Brian Marsh, chairman of insurance sector investment company BP Marsh & Partners (BPM:284p). It’s a company I know well, having first advised buying the shares at 88p ('Hyper value small-cap buy', 22 Jan 2012), and last reiterated that advice at 260p (‘Investment company watch’, 12 Feb 2018). It proved the right call as BP Marsh has just reported a 24 per cent increase in its net asset value (NAV) to £98.9m, or 339p a share, in the year to the end of January 2018.
The drivers of the stellar investment performance came from two of the company’s largest shareholdings: LEBC, an independent financial advisory firm that has been generating explosive earnings growth from developing its traditional advice model and growing corporate project work; and Nexus Underwriting, an independent speciality managing general agency that has been making some shrewd acquisitions to scale up the operation. BP Marsh’s valuation committee believes LEBC’s equity is now worth £56m, or 80 per cent higher than its valuation 12 months earlier, implying a value of £33.1m on BP Marsh’s 59.3 per cent stake. The uplift looks justified. Having reported a 42 per cent rise in trading profit to £3m on revenue up 17 per cent to £18.1m in the 12 months to the end of September 2017, LEBC is “trading significantly ahead of last year”. Moreover, I understand that LEBC “is looking to IPO on the London Stock Market next year”, which could bring another windfall gain for BP Marsh.
It gets better because BP Marsh’s 17 per cent stake in Nexus is worth £20.5m, up from £13.9m 12 months earlier, which values the equity in that company at £120m. However, a well informed report in Insurance Insider last week suggests that private equity houses have been running their rule over Nexus and have valued the business at closer to £180m, or 18 times its 2017 reported cash profit. Hyperion Insurance sold its majority stake in CFC Underwriting to a consortium of private investors and the management team on a multiple of 22 times cash profits, so the exit multiples being bandied around for Nexus don’t seem out of place.
The potential for corporate activity aside, BP Marsh has a new 19.6 per cent shareholder, Australian Stock Exchange-listed PSC Insurance. PSC is acquiring £15.5m of new shares in a placing at 252p a share, and just shy of £3m of stock from Mr Marsh, who will still own a 44 per cent stake. BP Marsh is raising a further £1.5m at the same price through a one-for-21 open offer to existing shareholders. The new funds will be used by BP Marsh to fund new investments. More importantly, PSC is looking to enter into the US insurance market, so having a large investor on side should help accelerate and add value to both of BP Marsh’s US holdings: Mark Edwards Partners, and XPT. These have a combined value of £8.4m. BP Marsh's existing shareholders subscribing for the open offer will also receive the final dividend of 4.76p a share, up 27 per cent year on year.
With the investment risk to both LEBC and Nexus skewed firmly to the upside, I rate the shares a buy and have a new target price of 339p to reflect the real prospect of a realisation of value from both holdings to send BP Marsh’s NAV surging again. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging.
Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.
