On the M&A beat

A placing and open offer at 252p raised £17m in July, which resulted in Australian Stock Exchange-listed PSC Insurance taking a 19.6 per cent stake and BP Marsh’s NAV dipping slightly to 321p. The fresh funds have buoyed BP's cash pile to £14.5m at its 31 July half year-end and there are sound reasons to expect a continuation of the sharp valuation uplifts from the existing portfolio and new investments, too.

In fact, there has been further positive news from BP Marsh’s largest holding, LEBC, an independent financial advisory firm that has been generating explosive earnings growth from developing its traditional advice model and growing corporate project work. At its 31 January 2018 financial year-end, BP Marsh’s 59.3 per cent stake was in the books for £33m, implying a value of £56m for the whole of LEBC. Since then, LEBC has reported a trading profit of £2.4m in its latest six-month trading period, up from £1.8m in the second half of last year, and £1.2m in the same period of 2017. This implies LEBC’s equity is being valued on a modest 13 times 12-month rolling trading profit. The business is cash generative, so much so that LEBC has paid off in full the £1.5m it borrowed earlier this year from BP Marsh to fund the £5m acquisition of Bristol-based financial advisory firm Aspira. A London Stock Exchange IPO of LEBC is slated for 2019, so offering an exit strategy for BP Marsh.

BP Marsh also owns a 17.2 per cent stake in Nexus Underwriting, one of the 100 fastest growing private companies in the UK according to latest The Sunday Times BDO Profit Track rankings. Nexus doubled its cash profits to £10m in 2017 and revealed a few days ago that is on course to write gross premium income across 15 specialty classes of £350m this year and make cash profits of £15m. Part of the growth spurt reflects three well-timed debt-funded acquisitions in the second half of last year: Zon Re Accident Reinsurance, a US-based Reinsurance Underwriting Agency; marine cargo specialist Vectura Underwriting; and trade credit specialist Equinox Global. It also reflects the contribution from two new acquisitions made by Nexus, both of which were announced in the past week: Huntingdon Underwriting, a Malaysian-based managed general agency (MGA); and Altitude Risk Partners, a London-based MGA specialising in aerospace insurance across 130 territories.

Bearing in mind Nexus’s upgraded profit guidance, the carrying value of BP Marsh’s 17.2 per cent stake is £20.5m in the company’s accounts, which values Nexus’s equity at £120m. After taking into account Nexus’s borrowings, BP Marsh’s read through enterprise valuation of Nexus equates to no more than 10 times 2018 cash profits. That’s interesting because Nexus is in play, and an outcome of the company’s strategic review – which could lead to a sale of the company – is due anytime soon. Ardonagh, the insurance group that has backing from private equity firms HPS Partners and Madison Dearborn, has been mooted as one potential acquirer of Nexus. I would expect any takeover for Nexus to be pitched at a very decent premium to BP Marsh’s read through valuation at the start of the year. The holding accounts for 57p a share of BP Marsh's NAV, so it is material.

The scope for corporate activity to release cash from BP Marsh’s two largest holdings, and likely positive newsflow from the rest of the portfolio, suggests that the forthcoming half-year results on Tuesday 16 October are unlikely to disappoint. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies 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 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. Details of the content of both books can be viewed on www.ypdbooks.com.