Eye-catching interim results from Gresham House (GHE:555p), a fund manager that specialises in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, highlight just why I remain keen on the company’s investment prospects.
Having bedded down last year’s two major acquisitions – Oxford-based FIM Services, an alternative fund manager specialising in forestry and renewable energy; and the earnings-enhancing purchase of the fund and the investment management business that runs Baronsmead VCT and two open-ended vehicles, LF Livingbridge UK Micro Cap Fund and LF Livingbridge UK Multi-Cap Income Fund – Gresham House has increased assets under management (AuM) by 8 per cent to £2.45bn since the start of 2019, all of which is organic growth.
The increase in AuM was driven by a £50m follow on fundraise for Gresham House Energy Storage Fund (GRID:104.5p), a specialist investment company that invests in UK energy storage systems (ESS); £94m of new fundraises for Gresham House’s forestry funds; and £25m for Baronsmead’s VCTs. Since, the half-year end, Gresham House Energy Storage Fund has raised a further £15m. Expect fund inflows to continue, too.
For instance, chief executive Tony Dalwood told me during this morning’s results call that the company’s British Strategic Investment Fund (BSIF), a closed-ended Guernsey Limited Partnership that invests in relatively illiquid investments in UK housing and infrastructure-related assets, is on course to have 60 to 70 per cent of its £165m investment commitments deployed by the year-end, and plans a final close in the fourth quarter to boost the fund size to £250m.
Mr Dalwood also points out that a number of the investments made by BSIF such as vertical farming (the practice of producing food and medicine in vertically stacked layers) and waste recycling (specifically, for the healthcare industry) have scope to become platforms for much bigger projects in their own right, thus providing another source of organic growth. Gresham House’s New Energy division will be adding to its wind and solar powered projects before the year-end, too.
Importantly, the weighted average length of management contracts is 16 years, highlighting the long-term nature of a high quality income stream that more than trebled to £15.3m in the first six months of this year. It’s increasingly profitable, too. That’s because with the benefit of a relatively fixed cost base, and £1m of annualised cost savings, adjusted operating profit rose 11-fold to £4.4m on a margin of 29 per cent, so is making strong headway towards the medium-term 40 per cent margin target.
Indeed, analyst Justin Bates at Canaccord Genuity is predicting a full-year operating margin of 34 per cent based on pre-tax profits trebling to £9.1m on annual revenue of £26.8m to produce adjusted earnings per share of 29p (up from 13.9p in 2018). On this basis, expect a 17 per cent hike in the dividend per share to 3.5p. Moreover, Mr Bates notes that AuM are “running slightly ahead of our forecast, and we see upside risk but leave them broadly unchanged for now”.
| Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Closing bid price (p) 13.09.19 | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1100 | 0 | 181.2% |
| Gresham House | GHE | 312.5 | 540 | 3 | 73.8% |
| Oakley Capital | OCI | 146.5 | 230 | 13.5 | 66.2% |
| Bowleven (see note two) | BLVN | 18.935 | 10.45 | 15 | 56.3% |
| Gresham House Strategic | GHS | 796 | 1030 | 43.35 | 34.8% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| French Connection | FCCN | 45.7 | 37 | 0 | -19.0% |
| Walker Crips (see note five) | WCW | 44.9 | 25 | 5.59 | -31.9% |
| Average return | 76.4% | ||||
| FTSE All-Share Total Return | 5180 | 7506 | 47.2% | ||
| FTSE AIM All-Share Total Return | 747 | 1004 | 38.2% | ||
| 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). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your hodings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takover and hitting target prices', 3 June 2019). Return is adjusted to factor in this capital return. | |||||
| Source: London Stock Exchange share prices | |||||
Fund management expertise endorsed by industry leaders
Not surprisingly, Gresham House is attracting interest in the industry. The company has entered into a 50:50 joint-venture fund with global asset manager Aberdeen Standard Investments (ASI) to adopt the strategic public equity (SPE) strategy that Gresham House has so successfully deployed at Aim-traded investment company Gresham House Strategic (GHS:1,030p), another constituent of my market-beating 2016 Bargain Shares portfolio and the best performing small-cap fund in 2019 (‘Gresham House lands joint venture with Aberdeen Standard’, 26 March 2019).
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 focus is on shares that suggest a company is intrinsically undervalued, such as low valuation multiples and tangible asset cover, with a strong bias to cash generation, scope to improve return on capital and enhance value through strategic, operational or management initiatives. The new joint venture will benefit from ASI’s distribution network, so has scope to substantially increase AuM. The fact that ASI has subscribed for 1.3m new shares in Gresham House at 496p each is quite some endorsement.
The cash from that investment and the exercise of call warrants, at 323.7p a share, meant that Gresham House had cash and liquid assets of £36.3m at the end of June. Borrowings of £3m have since been paid down which has been largely covered by the £1.2m cash inflow from the exercise of call warrants since 30 June, and the £1m anticipated inflow when all the outstanding 321,000 call warrants are converted before expiry in December this year. After factoring in the second half operational cash inflow, Mr Bates at Canaccord predicts Gresham House will have cash and liquid investments worth £40.9m at the end of 2019, a sum worth 146p a share. Effectively, this means that the shares are priced on a modest cash-adjusted price/earnings (PE) ratio of 13, a low rating for an asset manager that is generating strong organic revenue growth and at an increasingly higher profit margin. Sensibly, Gresham House’s board is considering making acquisitions in 2020 to utilise some of its burgeoning cash pile, having already proven its ability to both integrate and add value to the ones made in 2018.
So, having included Gresham House’s shares, at 312p, in my 2016 Bargain Shares Portfolio, and last advised buying around the current level in my last article (‘Gresham House organic expansion underpriced’, 28 May 2019), the shares remain firmly on my buy list with a target price of 700p. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.
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Simon Thompson has been named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards, a prestigious event celebrating the best and rewarding the finest professionals and companies that work within the AIM and NEX communities. It is attended by institutions, fund managers, brokers and advisors operating in the sub-£100m market cap quoted company sector.
