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Gresham House on course to treble profits

The specialist asset manager now has £2.3bn assets under management and is producing eye-catching organic growth on its range of alternative investment funds
March 7, 2019

Chief executive Tony Dalwood of specialist asset manager Gresham House (GHE:460p) was in confident mood during our results call this morning, and with good reason after the company moved into sustainable profitability last year.

The eye-catching headline 250 per cent increase in assets under management (AUM)from £649m  to £2.27bn was buoyed by the May 2018 acquisition of Oxford-based FIM Services, a specialist alternative fund manager specialising in forestry and renewable energy; and the earnings enhancing purchase at the end of November 2018 of the fund and investment management business of Livingbridge, the asset manager that runs the Baronsmead VCT and two open-ended vehicles, LF Livingbridge UK Micro Cap Fund and LF Livingbridge UK Multi-Cap Income Fund. 

Including contingent consideration, the aggregate consideration of £65m looks a fair price to pay for businesses that added a combined £1.14bn of AUM. FIM produced an operating profit of £3.2m on revenues of £5.2m in its first 32-weeks under Gresham House’s ownership, and Livingbridge contributed a £495,000 operating profit on revenues of £712,000 in December 2018. I covered the rationale for both acquisitions when I suggested Gresham House’s shares were worth buying around the current share price ('Gresham House powered up for profitable growth', 11 November 2018). They still are.

Both purchases are already working out really well. Mr Dalwood told me that the £25m raised by Baronsmead VCTs earlier this year closed within 10 days of launch such was the level of investor demand, and there is an opportunity to add substantial scale to both Livingbridge’s top quartile performing OEICs by tapping into Gresham House’s distribution network. The company also plans to cut £700,000 of overheads out to bolster profits.

Organic growth drivers

It’s worth pointing out that this is not just an acquisition-led story as the fund manager produced organic AUM growth of 30 per cent on its existing funds. Gresham House launched a new £100m fund last November, Gresham House Energy Storage Fund (GRID:103p), to offer infrastructure and renewable investors a diversified and robust source of income, independent of renewable subsidies or the absolute level of power prices.

Gresham House has also deployed half the £165m investment commitments for its British Strategic Investment Fund, a closed-ended Guernsey Limited Partnership which invests in relatively illiquid investments in UK housing and infrastructure-related assets. Mr Dalwood envisages a final close later this year to increase the fund size to £250m, and a “mark two version fund” to be launched within 12 months. As I highlighted in my November 2018 article, Gresham House’s New Energy division has been adding to its wind and solar powered projects too, thus adding a highly scalable asset class to the mix.

Target price

Importantly, the progress being made is being undervalued by investors. That’s because after taking into account the full contribution from new fund launches and last year’s acquisitions, analyst Justin Bates at joint house broker Canaccord expects pre-tax profits to treble to £9m in 2019. On this basis, expect adjusted earnings per share (EPS) to double to 29.4p and support a 50 per cent rise in the dividend per share to 4.5p.

However, these forecasts don’t include performance fees nor carried interests. It’s also worth flagging up that Gresham House has net cash of £5.2m on its balance sheet after factoring in last month’s receipt of a final £1m payment from Persimmon on a legacy land deal. The company also has an investment portfolio worth £17.8m including a stake worth £8.9m in Aim-traded Gresham House Strategic (GHS:950p), a company I am also positive on. Gresham House has the mandate to run that fund by applying private equity techniques to UK and European smaller public companies with a view to generating a 15 per cent annualised return over the medium term. The company deploys similar investment techniques to the £60m portfolio of investment company LMS Capital (LMS: 47.6p). Other investments include a £4m stake in Gresham House Energy Storage Fund (GRID), and interests in forestry and renewable energy projects.

Bargain Shares Portfolio 2016 performance 
Company nameTIDMOpening offer price (p) 05.02.16 Latest bid price (p) 07.03.19Dividends (p)Total return (%)
Bioquell (see note one and article)BQE1255900372.0%
VolvereVLE41910100141.1%
Bowleven (see note two)BLVN18.93514.41566.7%
Gresham HouseGHE312.5450044.0%
Oakley Capital OCI146.518811.2536.0%
Juridica (see note three)JIL36.1143227.4%
Gresham House StrategicGHS79693032.2520.9%
Mind + Machines (see note four)MMX87.502.8%
French ConnectionFCCN45.7370-19.0%
Walker Crips (see note 5)WCW44.9255.59-31.9%
Average return    66.0%
FTSE All-Share Total Return  51807119 40.7%
FTSE AIM All-Share Total Return 7471029 41.1%
Notes:
1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019.
2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale.
3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table.
4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018).
5. Simon Thompson advised selling Walker Crips shares on Monday,4  March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019)
Source: London Stock Exchange share prices

The point is that the net cash pile and the liquid investment portfolio account for £23m (92p a share) of Gresham House’s net asset value of £79m (318p a share). So, effectively the shares are being rated on a cash-adjusted PE ratio of 12 and on a modest 1.4 times book value even though the business has passed the inflexion point whereby profits are set to scale up sharply as last year’s underlying operating margin of 20 per cent ratchets up towards the board's 40 per cent target rate. So, having included Gresham House’s shares at 312p in my 2016 Bargain Shares portfolio, the shares remain firmly on my buy list.

Please note that my 2016 portfolio has returned 66 per cent on a total return basis since inception and I have now recommended banking full or partial profits on four of the 10 holdings to extract 91 per cent of the initial capital invested. This means that the portfolio has not only outperformed the respective 40.7 and 41.1 per cent total returns on both the FTSE All-Share and FTSE Aim All-Share indices, but with less risk given the hefty cash position. I would recommend staying fully invested in Gresham House though given that the shares offer potentially 41 per cent to my 650p target price. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.

Limited offer: Successful Stock Picking Strategies and Stock Picking for Profit can be purchased for the combined promotional price of £25 plus postage and packing of £3.75 [UK] subject to stock availability.