Insurance sector investment company BP Marsh & Partners (BPM:286p) is on course to maintain its enviable track record which has seen the company increase its net assets at an average annual compound growth rate of 11.9 per cent in the past 28 years.
In the six months to end July 2018, BP Marsh’s equity portfolio of 18 investee companies posted an average gain of 6.7 per cent (only one investee company was marked down in value), buoyed by further gains on its two largest holdings: 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 and one of the 100 fastest growing private companies in the UK according to The Sunday Times BDO Profit Track rankings.
BP Marsh’s 59.3 per cent stake in LEBC is now worth £36.8m, up almost 11 per cent since the end of January 2018, and accounts for 41 per cent of its £88.3m equity portfolio. The latest valuation uplift reflects a doubling of LEBC’s trading profit to £2.4m in its last reported six-month period, and is underpinned by a robust outlook. I have good reason to expect further investment gains from this holding too. That’s because a debt-free LEBC is still only rated on 13 times trading profit, a multiple several points lower than listed rivals, and that conservative valuation is set to come into focus as LEBC is planning to list its shares on the London Stock Exchange in the first half of 2019. It could attract interest from rivals too.
There should also be further investment upside to BP Marsh’s 16.5 per cent stake in Nexus Underwriting even after the value of the holding was raised from £20.5m to £22m in the first half of this year. Nexus’ management guidance points towards their company delivering 50 per cent higher cash profits of £15m in 2018 based on gross annual premium income of more than $350m (£267m), implying the holding is only being valued on a modest multiple of 11 times cash profits to Nexus’ enterprise valuation after factoring in its borrowings of £30m. The profit growth largely reflects three shrewdly timed debt-funded acquisitions in the second half of 2017: Zon Re Accident Reinsurance, a US-based Reinsurance Underwriting Agency; marine cargo specialist Vectura Underwriting; and trade credit specialist Equinox Global. It also factors in the contribution from two acquisitions made by Nexus last month: Huntingdon Underwriting, a Malaysian-based managed general agency (MGA); and Altitude Risk Partners, a London-based MGA specialising in aerospace insurance across 130 territories.
Admittedly, a potential takeover of Nexus looks less likely now than a month ago when I flagged up the possibility (‘On the M&A beat’, 19 September 2018), but frankly it really doesn’t matter. That’s because if Nexus' management continue to build their business as they have successfully done so since BP Marsh made its initial investment in 2014 – Nexus has made 10 acquisitions in the past three years – then shareholders can look forward to an even more lucrative exit in due course.
In the meantime, BP Marsh’s shareholders can expect a continuation of a progressive dividend policy that has seen the board pay out 19.69p a share in the past six financial years. With uncommitted cash of £12.7m on the balance sheet, and dividend income and interest earned from a £14.8m loan portfolio (to its investee companies) covering annual running costs, then the directors have committed to a full-year payout of at least 4.76p a share. They have also committed to NAV per share enhancing buy-backs when the share price discount widens to 15 per cent, effectively putting a floor under the share price at the current level.
So, having first advised buying BP Marsh’s shares at 88p ('Hyper value small-cap buy', 22 Jan 2012), I feel that a 14 per cent share price discount to end July 2018 NAV of 333p is overly harsh given the investment risk to the equity portfolio is heavily skewed to the upside. Buy.
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