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BP Marsh issues bullish guidance

The Aim-traded insurance sector investment company is on course to deliver at the full-year results
October 17, 2019

“We have every expectation of delivering growth in net asset value (NAV) per share and trading profit for the full-year”, said chairman and 41.77 per cent shareholder Brian Marsh of Aim-traded insurance sector investment company BP Marsh & Partners (BPM:270p) after he announced a record NAV per share of 361p in the six months to 31 July 2019, up from 350p six months earlier.

It was a robust performance in light of the previously flagged write-down of the company’s 59 per cent stake in financial advisory group LEBC which I commented on when I last rated the shares a buy at 216p (‘Takeover, tenders and taking profits’, 9 September 2019). The stake in LEBC had a carrying value of £35.5m (98.6p a share) in BP Marsh’s 2018/19 annual accounts, and accounted for over a quarter of BP Marsh’s reported net asset value (NAV) of £126.2m (350p a share) at the time. This week’s interim results revealed that the holding has been written down to £23.9m (66p a share) after LEBC agreed voluntarily to cease providing defined-benefit (DB) transfer advice following a market-wide review by the Financial Conduct Authority (FCA).

The pension advisory market has seen a number of IFA firms withdrawing from giving DB transfer advice including listed peer Mattioli Woods (MTW:665p) and Sanlam. The DB segment of LEBC’s business accounted for a fifth of its annual revenue, and the methodology behind BP Marsh’s latest valuation of the holding is consistent with previous valuation multiples applied and takes into account LEBC’s reduced annual revenue stream of £19m.

Diversified portfolio drives NAV growth

Despite the write-down, investment gains made on 10 of BP Marsh’s other 16 investee companies more than made up for the shortfall. The most notable was the valuation uplift from £30.2m to £40.3m in the company’s 17.77 per cent stake in Nexus Underwriting. This values the acquisitive independent specialty managing general agency (MGA) at an enterprise valuation of around £270m, or the equivalent of 13.5 times forecast 2020 cash profit of £20m, up from an annualised forecast of £15.2m for the 2019 financial year. Interestingly, BP Marsh’s managing director Alice Foulk notes that Nexus’ directors would view BP Marsh’s latest valuation of its stake as “unbelievably conservative”, a point worth considering given that BP Marsh has made certain [undisclosed] proposals to Nexus’ board which if they become effective would undoubtedly highlight the hidden value.

There is hidden value in the company’s 35 per cent stake in XPT, a New York based wholesale insurance broking and underwriting agency across the U.S. specialist insurance sector, even after BP Marsh raised its valuation by 29 per cent to almost £10m. BP Marsh first invested in the start-up business in June 2017 since when XPT’s gross written premium income has grown to $165m and the business is on course to deliver $3.9m cash profit this year.

Post-BP Marsh’s half-year end, XPT successfully secured $40m (£31.2m) of funding from Madison Capital Funding LLC of which $18m refinanced its current debt facility, and $22m is earmarked for strategic acquisitions in the North American insurance market. Interestingly, as part of the transaction, Madison Capital took an equity interest in XPT which values it at an enterprise value of $54m (£43m), representing a 10 per cent premium to the valuation BP Marsh has used in its latest accounts to value its own holding. Furthermore, this doesn’t take into account the likely valuation upside resulting from a recent acquisition that has taken XPT’s gross written premiums to $200m. Moreover, there is potential for a highly profitable exit sooner than BP Marsh may have first envisaged given that Mr Marsh envisages “XPT will outgrow us very quickly”.

There is also scope for further valuation upside in BP Marsh’s stake in ATC, an Australian-based MGA and Lloyd's Coverholder, specialising in accident & health, construction & engineering, trade pack and sports insurance. BP Marsh invested £2.8m in the business in July 2018 and raised the valuation of its 20 per cent stake by a third to £7.15m in its latest accounts after ATC’s directors doubled their cash profit guidance for 2019, a reflection of a 37 per cent increase in the company’s 2019 gross written premium to $84m.

Exploit unwarranted share price discount to NAV

It’s worth flagging up that BP Marsh’s loan portfolio, worth £19.75m, is spread across nine investee companies and earns the company around £1.2m in annual interest income. Coupled with annual dividends received (£2.7m in the 2018/19 financial year) from investee companies, these two income streams fully cover BP Marsh’s annual operating costs, meaning that the directors are able to hold onto their investments to maximise their full upside potential.

This long-term approach to investing helps explain why the company has delivered a compound annual growth rate in NAV per share of 11.7 per cent since inception in 1990 and why BP Marsh’s shares have produced a 229 per cent total return on an offer-to-bid basis and including aggregate dividends per share of 26p since I first advised buying into this special situation when the shares were priced at 88p ('Hyper value small-cap buy', 22 January 2012). That equates to an average annualised return of 16.6 per cent, and one driven by the company’s strong investment performance.

Trading on a bid-offer spread of 268p to 274p, offering a 1.7 per cent dividend yield, and rated on an unwarranted 24 per cent discount to NAV, a return to the June 2019 all-time share price high of 314p, and perhaps beyond, looks firmly on the cards. I would also flag up that revenue generated from 50 per cent of investee companies is overseas, so BP Marsh’s investment portfolio offers a decent hedge against sterling weakness. Buy.

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