Targeting a major chart break-out

Aim-traded insurance sector investment company BP Marsh & Partners (BPM: 310p) has delivered yet another double-digit annual shareholder return for the 2020/21 financial year, buoyed by eye-catching gains on its start-up companies. There are strong reasons to expect the well-run management team to continue to deliver on their 10 per cent net asset value (NAV) growth target, too.

Furthermore, there is a possibility of corporate events that would release liquidity from both of BP Marsh’s largest holdings: Nexus Underwriting, an independent speciality managing general agency (MGA) that has been scaling up through organic growth and acquisition; and IFA group LEBC. BP Marsh’s 17.5 per cent stake in Nexus is held at £40.9m, or almost four times the £11.1m cost of the investment, and the 59.3 per cent stake in LEBC is worth £25m, or double cost. Their combined £66m carrying value accounts for 44 per cent of BP Marsh’s NAV of £150m (416p a share).

It’s also worth noting that £6.8m of the £12.9m equity portfolio gains were booked on four of BP Marsh start-up companies, all of which have been performing incredibly well and are likely to continue doing so. The 30 per cent stake in SSRU, a start-up Managing General Agencies (MGA) investment, specialising in the energy, construction and natural resources space in Canada, has produced a 142 per cent internal rate of return since BP Marsh backed the management in January 2017. The shareholding was written up 124 per cent to £5.6m, still a modest valuation given that SSRU is on course to “substantially” increase last year’s £2.2m cash profit in 2021.

The same is true of BP Marsh’s 35 per cent stake in UK Marine Cargo MGA Fiducia which almost doubled in value to £3.3m. After launching five years ago, Fiducia is currently budgeting to produce gross written premium (GWP) of £24m in 2021 and continues to seek out new opportunities in underserved areas of the marine market, working with brokers and insurance carriers to develop products to support these areas. Fiducia’s cash profit is expected to double to £0.5m this year, too.

Lilley Plummer Risks (LPR), a specialist marine Lloyd's broker, has quickly expanded its product offering into several niche and diverse areas across several geographic locations, since BP Marsh invested £1m for a 30 per cent stake in the start-up in October 2019. The holding was marked up by almost £1m to £2.3m, still a modest valuation considering LPR is forecast to increase cash profit by 74 per cent to £0.65m in 2021.

BP Marsh’s management team only made one new investment in 2020 and it was a beauty. The company’s 30 per cent stake in Oregon Based Sage, a provider of Workers Compensation insurance to niche industries, including inland delivery and field sport sectors, was marked up fivefold to £1.2m, and justifiably so as Sage is on course to almost quadruple cash profit to £370,000 this year.

So, with multiple profit drivers for investee companies in place, and BP Marsh’s share price closing in on the 2018 and 2019 record highs of 314p, then there is a strong likelihood of a major chart break-out and one that should gather momentum if there is a liquidity event in the coming months to spark a significant narrowing of the unwarranted 27 per cent share price discount to NAV.

BP Marsh’s shares have produced a 278 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 18 per cent since last my last buy call at 260p (‘Exploiting valuation anomalies’, 2 Oct 2020). My 375p target price could prove conservative if assets disposals are at a premium to carrying value. Buy.

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