I strongly believe that it pays to run winners until the rationale for making the original investment no longer holds, or the valuation becomes so stretched that the balance of risk-to-reward becomes unfavourable.
This explains why many companies I follow have produced substantial shareholder returns, a reflection of the compounding effect of recycling profits into businesses producing decent returns on capital. Moreover, as more investors recognise the track record of management, then previously below the radar companies become more main stream.
This is certainly the case of BP Marsh & Partners (BPM: 325p), an Aim-traded insurance sector investment company that has produced a 304 per cent total return (including dividends of 30.78p) since I first suggested buying the shares, at 88p ('Hyper value small-cap buy', 22 Jan 2012). The near 16 per cent annualised gain reflects the success of BP Marsh’s investment team in backing smart entrepreneurial management teams of start-up ventures.
The end game is generally a trade sale to larger rivals, realisations from which have helped lift net asset value (NAV) per share by 151 per cent to 430.4p since I initiated coverage. However, the 24 per cent share price discount to NAV simply fails to recognise the likelihood of further hefty portfolio gains.
BP Marsh on course for hefty realisations
- £5.3m unrealised portfolio gains lifts NAV to £155m
- £3.1m gain on holding in Nexus Underwriting
- AG Guard delivers 111 per cent valuation uplift to £3.2m
Aim-traded insurance sector investment company BP Marsh & Partners (BPM:325p) is bang on course to deliver yet another decent shareholder return for the 2021/22 financial year, buoyed by some chunky gains on its start-up companies. Moreover, there are prospects of cash realisations from the group’s portfolio of 19 investee companies, too.
Chairman and founder Brian Marsh noted during our results call that London-based managing general agency (MGA) Walsingham, a specialist in UK courier and taxi fleet motor insurance, is “a prime acquisition target that is highly likely to attract a bid”. BP Marsh holds a 40.5 per cent stake that was revalued from £2.25m to £3.7m (cost of £0.6m) in the latest half-year results, still a modest valuation for a business forecast to grow cash profit by 25 per cent to £1m this year.
I can see further investment upside from BP Marsh’s 25.5 per cent holding in Melbourne-based ATC Insurance, one of the largest underwriting agencies in Australia. The business handles gross written premiums of A$125m (£67.5m) and makes cash profit of over A$6m. Following ATC’s post period end acquisition of MB Prestige (on nine times multiple of the equity BP Marsh invested), BP Marsh holds a £12.5m stake in the combined entity. That’s £0.9m more than the carrying value in the group’s half-year accounts post a £1.55m uplift.
Expect further valuation uplifts from BP Marsh’s 30 per cent stake in a SSRU, a MGA investment specialising in the energy, construction and natural resources space in Canada. It’s held at £5.67m (cost nil) even though SSRU’s cash profits this year will be substantially higher than the £2.2m reported in 2020.
Furthermore, I can see cash realisations being the end game for 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 sensibly recycled a £4m loan repayment from Nexus to lift its equity stake to 19.2 per cent. The holding has a carrying value of £48m (cost of £15.1m) following a £3m uplift and now represents a third of the £140m equity portfolio. The group’s 59.3 per cent stake in LEBC is worth £25m, or double cost.
Of course, not all investments performed as well. BP Marsh’s 35 per cent in EC3 Brokers was written-down from its £6.5m cost to £3.1m after the Covid-19 pandemic impacted live entertainment insurance lines. However, some downgrades look harsh. For example, the 47.1 per cent stake in CBC UK, the retail and wholesale Lloyd’s insurance broker, was clipped £0.8m to £7.7m (cost £0.6m) even though the business is on course to materially increase last year’s cash profit of £1.6m. I can see the write-down being fully reversed at the year-end.
The bottom line is that with potential cash realisations on the cards from several investments, and start-ups producing material gains – the stake in Australian-based MGA AG Guard doubled in value after it entered a strategic partnership with a subsidiary of QBE Insurance – then my 375p target price is more than warranted. Buy.
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