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BP Marsh posts record net asset value

The insurance sector investment company has delivered an 11.9 per cent average annual compound growth in net asset value since 1990, and is not slacking either
June 11, 2019

Insurance sector investment company BP Marsh & Partners (BPM:300p) has delivered an 11.9 per cent average annual compound growth in net asset value (NAV) since 1990 by backing the management of its investee companies at the right time and then holding for the long run.

The company’s shrewd management team, led by founder and chairman Brian Marsh OBE, maintained this enviable track record in the 2018-19 financial year by posting a total shareholder return of 11.7 per cent. Moreover, Mr Marsh has “every reason to believe that we will repeat our usual mantra of delivering 10 per cent growth in NAV, dividend and trading profit in the current financial year, too”. He has every reason to think this way as BP Marsh’s investment committee has been recycling the net cash proceeds of £16.6m raised from last summer’s placing and open offer into new investments, and is delivering some hefty gains from the existing portfolio, too.

For example, the £2.85m investment BP Marsh made last July for a 20 per cent stake in ATC Insurance, an Australian-based Managed General Agency and Lloyd's Coverholder, specialising in accident, health, construction, engineering and sports insurance, was revalued upwards by 89 per cent to £5.4m after ATC “smashed profit forecasts”, according to BP Marsh’s managing director, Alice Foulk. The revaluation still looks conservative, equating to a multiple of 60 per cent of gross written premium (GWP) of AUS$61m (less cash), or around 10 times ATC’s annual cash profits.

It’s not the only eye-catching revaluation as BP Marsh’s 44.3 per cent stake in CBC, a retail and wholesale Lloyd's insurance broker, was lifted by 77 per cent in value to £4.9m, implying an equity value of £11m for CBC as a whole, or 11 times annual operating profit, which increased by 29 per cent in 2018. CBC’s trading performance is likely to be even better this year, highlighting the benefits of incentivising its staff following the management buy-in backed by BP Marsh. Moreover, CBC is well placed to benefit from the merger of Marsh & McLennan and Jardine Lloyd Thompson as there is a real opportunity to attract prime staff from those companies and then heavily incentivise them, the upshot being further valuation creation for CBC shareholders, including BP Marsh.

There was also a notable gain on BP Marsh’s second-largest holding, Nexus Underwriting, an independent speciality managing general agency that has been making some shrewd acquisitions. BP Marsh now holds an 18.5 per cent stake in Nexus with a carrying value of £30.1m, implying an equity valuation of £166m, or 11 times the annualised cash profit of £15.2m Nexus is forecast to make this year based on profit growth of 20 per cent and GWP of £313m. That represented a net valuation uplift of £4.4m and expect further investment upside here, too.

Admittedly, not all investee companies posted revaluation uplifts, but that’s why diversification is critical to portfolio management. In any case, a £2.6m provision is dwarfed by unrealised gains of £14.1m. In aggregate, annual dividends, fees and loan interest received from portfolio companies of £4.6m was well ahead of BP Marsh’s operating expenses of £3.9m, thus freeing up some cash to reward shareholders with a final dividend of 4.76p a share to be paid next month. Net profit of £12.5m is a very acceptable return on average net assets of £112m. Interestingly, BP Marsh has “£10m of projects in the pipeline”, so expect news on further investments later this year.

Shares in BP Marsh have produced a 265 per cent total return since I first advised buying at 88p ('Hyper value small-cap buy', 22 Jan 2012), representing a compound annual growth rate of 22 per cent, and have risen from the 280p level since I last advised buying (‘Alpha Alert for financial gains’, 18 Mar 2019). Trading on a 14 per cent discount to NAV per share of 350p, with management guidance supportive of a 10 per cent NAV uplift this year, and the directors’ committed to share buybacks if the share price discount widens to 15 per cent or more of NAV, the investment risk is firmly to the upside. Buy.

 

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