Aim-traded shares in specialist asset manager Gresham House (GHE:520p) have kicked on to an 11-year high after the company announced a 50:50 joint-venture fund with global asset manager Aberdeen Standard Investments.
The fund will adopt the Strategic Public Equity (SPE) strategy that Gresham House has successfully deployed for Aim-traded investment company Gresham House Strategic (GHS:965p), a company I remain positive on and also a constituent of my market-beating 2016 Bargain Shares Portfolio.
Specifically, Gresham House’s SPE strategy applies 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 focus is on shares that suggest a company is intrinsically undervalued, such as low valuation multiples and tangible asset cover, with a strong bias on cash generation, scope to improve return on capital and enhance value through strategic, operational or management initiatives.
Each investment opportunity is given a ‘Quality-score’ after considering a multitude of factors including: the attractiveness of the market in terms of its characteristics and dynamics; competitive positioning of the company within the market, including product and service offering, barriers to entry, ability to grow, pricing power, and client/customer quality; strength and experience of the board and whether their interests are aligned to other shareholders; and the likely attractiveness of the company to other buyers, be it institutional, trade or private equity. The Quality-score also considers customer concentration, sustainability of margins, capital intensity and the stability and predictability of cash flow.
Both Gresham House’s chief executive Tony Dalwood and Aberdeen Standard’s head of private markets Peter McKellar believe regulatory changes, such as MiFID II, have created an investment opportunity at the smaller end of the quoted market where pricing anomalies exist, a key reason why my annual Bargain Shares portfolios have performed so well over the past 20 years. The obvious upside for Gresham House’s shareholders is that the joint venture will benefit from Aberdeen Standard’s huge distribution network, so has potential to substantially increase assets under management (AUM).
It’s worth noting that Aberdeen Standard is taking a 5 per cent stake in Gresham House by purchasing 1.31m new shares, at 496p each. Factoring in the £6.5m cash from the share sale, analysts at Canaccord Genuity estimate that Gresham House will end this year with net cash and liquid assets worth £34m, a sum worth 131p a share based on an enlarged share capital of 26.3m shares. Strip that sum out and Gresham House’s shares, which have risen by 66 per cent since I included them, at 312p, in my 2016 Bargain Shares Portfolio, are effectively being rated on a 2019 cash adjusted price/earnings ratio of 13 and on 1.6 times book value.
That’s not expensive for a company that has a diversified and fast growing asset management business that manages in excess of £2bn of AUM in renewable energy generation, solar power, wind, forestry, and infrastructure funds, investment returns from which have a low correlation with equity markets. For good measure the company’s final dividend of 3p a share will be paid on 24 May 2019 and goes ex-dividend on 9 May 2019. I covered the annual results when the share price was 460p three weeks ago (‘Gresham House on course to treble profits’, 7 Mar 2019), and offering a further 25 per cent upside to my 650p target price, Gresham House’s shares continue to rate a buy at 520p. 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 onwww.ypdbooks.com.
