Exploiting valuation anomalies

Not even the Covid-19 pandemic could prevent Aim-traded insurance sector investment company BP Marsh & Partners (BPM: 260p) from reporting a near double-digit year-on-year rise in net asset value (NAV) to a record £142.6m (396p a share).

This reflects the benefits of having a diversified investment portfolio of 18 investee companies that between them are forecast to produce £1.1bn of gross written premium (GWP) and £121m of commission fee income this year. All bar one of BP Marsh’s 11 Managing General Agencies (MGAs) investments reported valuation uplifts in the six months to 31 July 2020, the stand outs being: ATC Insurance, an Australian MGA specialising in accident & health, construction & engineering, trade pack and cyber insurance; and Stewart Specialty Risk Underwriting (SSRU), a Toronto-based MGA providing insurance solutions to clients in the Canadian property & casualty sector. The two investments accounted for a third of the £6m unrealised gains booked by BP Marsh, a reflection of their impressive operational performances.

A couple of years ago, BP Marsh acquired a 20 per cent stake in ATC, since when the business has increased GWP from A$60m to expectations close to A$100m in its current year to June 2021. ATC’s cash profits are motoring, too, up 28 per cent in the 12 months to end June 2020, the reason why the holding is now in the books for £7.4m, well above the £2.6m initial cost. BP Marsh’s 30 per cent stake in SSRU has produced eye-watering returns, too; a nominal investment in the start-up three years ago is now worth £3.5m, a valuation underpinned by forecasts that SSRU’s GWP will almost treble to Can$32m this year after it established a new property team with Can$15m of capacity.

There have also been some hefty gains amongst BP Marsh’s six insurance brokers. For instance, Lilley Plummer Risks, a specialist marine Lloyd's broker in which BP March invested £1m for a 30 per cent stake 12 months ago, reported £0.5m of cash profit in its first full year of operation. The holding is now worth £1.7m. Another is XPT, a New York-based wholesale broking and underwriting agency across the US specialist insurance sector. XPT secured $40m (£31.2m) of funding from Madison Capital Funding LLC last year to provide firepower for strategic acquisitions in North America. It’s been doing just that and performing well, too, the reason the carrying value of its 29.9 per cent stake jumped by 16 per cent to £12.7m, well above the £7.3m initial cost. Moreover, XPT is expected to produce cash profit of US$7m on GWP of US$300m in 2020, implying a read through valuation of 12.5 times cash profit to enterprise valuation based on BP Marsh’s carrying value. Expect further valuation uplifts as XPT’s profits continue to ratchet up.

Exits look firmly on the cards, too. Indeed, BP Marsh managing director Alice Foulk revealed during our results call that she “wouldn’t be surprised if people approach us [for our 77 per cent stake in Summa Insurance Brokerage] over the next 12 months”. The holding is in the books for £6.9m following a £0.8m valuation uplift. Also, analyst Barrie Cornes at brokerage Panmure Gordon highlights “strong demand from private equity firms to enter BP Marsh’s space, giving potential exit opportunities for its investee companies.” Investors simply haven’t cottoned onto this which is why BP Marsh’s shares are rated on an unwarranted 34 per cent discount to book value. I certainly have and can see future exits providing a strong share price catalyst to drive a re-rating towards my 350p to 360p target price range.

BP Marsh’s shares have produced a 218 per cent total return (including dividends of 28.34p) since I first suggested buying at 88p ('Hyper value small-cap buy', 22 Jan 2012) and are up 20 per cent since last my last buy call (‘Ben Graham deep value play’, 10 June 2020). All-time highs beckon. Buy.

Tap into BigBlu’s accelerated growth

■ Three BDUK grant funded contract wins since late September.

■ Massive share purchase by shrewd investor.

Aim-traded BigBlu Broadband (BBB:95p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products, has announced a raft of contract wins for its 69.7 per cent-owned Quickline subsidiary since I covered the interim results (‘Targeting tech stocks’, 10 August 2020).

Quickline is building its own fixed wireless access networks, supported by increasing amounts of fibre infrastructure, to target the ‘digital divide’ in the UK. The government has committed to a £1.7bn superfast broadband programme, a £200m 'rural gigabit programme' and set aside £5bn to fund gigabit-capable technologies to the hardest hit 20 per cent of households.

In the space of a fortnight, Quickline has won £19m of contracts across Lincolnshire and West Yorkshire to extend its fibre-backed, fixed wireless network, thus enabling 11,200 business premises in rural areas to connect to superfast, ultrafast and in some cases gigabit speed broadband services. The networks will also pass by 5,000 residential homes within two years. Quickline is committing £3.9m of investment to the network roll-out with the £15.1m balance being grant funded from Broadband Delivery UK, part of the Department for Culture Media and Sport.

The plan is to quadruple Quickline’s customer base to 30,000 and make cash profit of £6.5m within three years. If successful, BigBlu’s 69 per cent stake in Quickline should be worth more than its own market capitalisation of £49m. Listed managed services and telecoms peers are valued on enterprise value to cash profit multiples of 11 times.

Importantly, Quickline is well funded, having raised £8m of equity and already secured a £4m credit facility to ramp up its new infrastructure (masts, and customer equipment) programme (‘BigBlu’s accelerated growth strategy’, 29 August 2019). BigBlu also has net cash of £6m (10p a share) on its own balance sheet following the £37.8m disposal of its UK and European satellite broadband businesses earlier this month.

Christopher Mills, founder of Harwood Capital and non-executive director of BigBlu, certainly sees the upside – the investment adviser has splashed out £2.26m buying shares, almost all of which was on behalf of North Atlantic Smaller Companies Investment Trust, the fund run by Mr Mills. Harwood funds now have a 27.7 per cent interest in BigBlu’s shares. It’s easy to see why as analysts at finnCap expect BigBlu’s pre-tax profit and EPS to surge by two-thirds to £4.5m and 6.9p, respectively, in the 2020/21 financial year.

Moreover, as Quickline wins more contracts to underpin growth in future years, then more investors are likely to cotton on to the investment opportunity on offer. It’s one that should provide material upside to my target range of 150p-160p, a price level that would value BigBlu in line with peers on an enterprise valuation to cash profit multiple basis. Buy.

Ramsdens’ value credentials

■ Profits materially better than analysts’ forecast.

■ Significantly higher cash position.

Middlesbrough-based Ramsdens (RFX: 127p), a diversified financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, has issued a pre-close trading update that has beaten analysts forecast by a country mile.

In the 12 months to 31 March 2020, Ramsdens reported a 30 per cent increase in pre-tax profits to a record £8.5m on revenue of £59.5m, a result that drove up earnings per share (EPS) from 16.7p to 21.4p (‘Shopping for a bargain buy’, 28 May 2019). The UK lockdown came into force in the last week of March, so had little impact on that trading period. Ramsdens then closed all its 159 stores on 24 March, and furloughed 700 staff until 28 May. It wasn’t until mid-July before they were all open again for business following a phased re-opening.

As a result, analyst Jamie Donald at Liberum Capital had predicted a pre-tax loss of £3.5m on revenue of £11m in the six months to 30 September 2020. In the event, Ramsdens has reported a pre-tax profit of £500,000. Having previously changed its financial year end to 30 September 2020, this means that Ramsdens will now report a pre-tax profit of £9m and earnings per share (EPS) of 22.8p for the 18-month period, or 80 per cent higher than analysts had previously forecast. The key drivers for the outperformance are a recovery in retail jewellery sales, and the strength of the gold price on precious metal buying and selling activities, a segment accounting for a fifth of gross profit.

It’s worth noting, too, that Ramsdens’ clients have been repaying their loans, so much so that the company now has net cash of £16m (53p a share). It also has a £10m undrawn revolving credit facility. True, foreign currency commission is 30 per cent of levels a year ago, but there is a silver lining as Ramsdens is taking market share from distressed high street foreign currency exchange operators and earning higher spreads, too.

Ramsden’s strong balance sheet means that it’s well placed to acquire loan books from distressed rivals. Indeed, it purchased two small books (£250,000) at the period end. Also, with the gold price riding a wave, expect an uptick in the pawnbroking business (accounting for a quarter of gross profit) as loan books rebuild by providing short-term relief to cash-strapped, but asset-rich customers pledging their gold and jewellery.

Liberum are forecasting pre-tax profit of £3.9m and EPS of 9.8p for the 12 months to 30 September 2021, but these estimates look very conservative. However, even on this basis, the shares are only rated on a cash-adjusted forward price/earnings (PE) ratio of 7 and offer a prospective dividend yield of 4 per cent based on a 2021 pay-out of 4.9p a share. A price-to-book value of 1.1 times is attractive, too.

So, although the Covid-19 disruption to business this year has sent the share price well below the 165p entry point in my market-beating 2019 Bargain Share portfolio, I fully expect to recoup the paper losses in due course. Bargain basement 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].

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.