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Targeting small-cap deep value plays

Two cash-rich investment companies are trading on share price discounts of more than 33 per cent to book value even though the valuation risk remains to the upside.
Targeting small-cap deep value plays

I have always taken the view to run winners until a company’s valuation becomes overly stretched or the rationale for making the original investment material changes.

A case in point is BP Marsh & Partners (BPM: 299p), an Aim-traded insurance sector investment company that has produced a 275 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). In the past decade, the company’s net asset value (NAV) per share has risen 179 per cent from 166p to 462.7p. In the 12 months to 31 January 2022, NAV increased by 11 per cent to £166.6mn, buoyed by a 14.7 per gain on BP Marsh’s £149.3mn portfolio of 13 equity investments and £2.9mn net gains from three disposals which realised £9.9mn.

Since the financial year-end, BP Marsh has doubled net cash to £17.4mn (48p a share) by exiting Spanish insurance broker consolidator Summa Insurance Brokerage. The strong cash position will be mainly recycled to provide existing investee companies with additional capital to make strategic acquisitions, says managing director Alice Foulk. That’s a sensible strategy and one that should assist in delivering further double-digit increases in BP Marsh’s NAV per share.


BP Marsh set strong for 2022 and beyond

  • Annual pre-tax profit up 42 per cent to £19.4mn
  • Net cash has doubled to £17.4mn since January year-end
  • Cash to be recycled to support acquisitions targeted by existing investee companies
  • Proposed dividend raised 13.9 per cent to 2.78p

BP Marsh’s consistent valuation creation reflects its ability to back early stage insurance focused investments, provide ongoing capital where needed, and ultimately realise gains on exit.

For instance, BP Marsh’s £1.5mn equity stake in AG Guard was marked up in value to £3.5mn after the Australian underwriting agency entered into a new strategic partnership with Elders Insurance, a subsidiary of QBE Insurance Group, one of Australia's largest general insurers. 

As part of this arrangement, Ag Guard provides a specialised crop underwriting system and claims management service to the Elders branch network across Australia with insurance capacity provided by QBE Insurance. The partnership has sent AG Guard’s gross written premium surging from A$7mn to $40mn (£22.9mn) in the last 12 months, thus justifying the valuation uplift. It also means that BP Marsh’s 41 per cent stake in Ag Guard has produced an internal rate of return of 53 per cent since making its investment in July 2019.

Another good example is Stewart Specialty Risk Underwriting, a Canadian based Managing General Agent (MGA) that provides insurance solutions to clients in the construction, manufacturing, onshore energy, and transportation sectors. Founded by chief executive Stephen Stewart as a start-up in 2017, gross written premium is forecast to grow to C$70mn this year, up from C$50mn in 2021. Margins are on the rise, too, and Stewart has a habit of “under-promising and overdelivering”, says Foulk, so expect bumper growth in last year’s cash profit of C$4.5mn (£2.9mn). It’s not in the price.

That’s because although BP Marsh’s 30 per cent stake in Stewart Risk was hiked by 43 per cent to £8.1mn in the latest accounts, it only implies a valuation of £27mn for the entity. Stewart Risk is one of the investee companies BP Marsh is looking to provide acquisition capital to, so there is scope for corporate activity to accentuate future returns.

BP Marsh’s largest investment, a stake in Nexus Underwriting (since renamed Kentro), an independent speciality MGA that has been scaling up through organic growth and acquisition, looks ripe to be involved in some form of mergers & acquisition activity in the next 12 months, too. The holding accounted for £5.4mn (17.7p a share) of the £16.2mn unrealised gains made on BP Marsh’s equity investment portfolio in the 2022 accounts, placing a value of £51.5mn on its 19.05 per cent fully diluted stake, a read through valuation of 15 times cash profit.

So, with the portfolio performing well, and several investee companies valued on a single-digit earnings multiple – fast growing retail and wholesale Lloyd’s insurance broker CBC stands out as a candidate for further material valuation uplifts – I expect BP Marsh’s NAV per share to easily break-through the 500p level by next January.

Trading on an unwarranted 35 per cent share price discount to NAV, I maintain the 375p target I outlined at the start of the year (‘Exploiting a small-cap value play’, 17 January 2022). Buy.


Seeking Alpha

  • NAV per share rises 4 per cent to record 216p in 12 months to 31 March 2022
  • Maintained annual dividend of 4p a share fully covered by adjusted earnings per share (EPS) of 4p
  • Higher reported EPS of 13.3p reflects £5.9mn of portfolio gains

Alpha Real Trust (ARTL:143p), a company that invests in high-yielding property and asset-backed debt and equity investments, has delivered a record NAV per share of 216p in the 12 months to 31 March 2022.

The gains mainly reflect a windfall from a legacy investment in the Galaxia project, an 11.2-acre development in an established suburb of Delhi, India, that was held in the accounts at nil cost. Following the sale of the asset in April, £5.9mn has been paid to Alpha to boost net funds of £54.3mn reported at the financial year-end.

Part of the cash pile is being used to grow Alpha’s £36.4mn portfolio of 20 secured and mezzanine property loans, which generated annual weighted average income returns of 7.7 and 17.5 per cent, respectively, in the 12-month reporting period. Although Alpha booked £2.6mn of credit losses after two developers went into receivership, this is a rare occurrence as credit quality has been exemplary to date. Since the financial year-end, Alpha has increased the loan portfolio by £7.4mn to £43.7mn (71p a share), the high risk-adjusted returns justify the investment.

Alpha has also made four new investments in high yielding listed equity funds including GCP Infrastructure Investments, GCP Asset Backed Income Fund, and Sequoia Economic Income Fund. The listed equity portfolio is worth £11mn (18p a share) and generates a dividend yield of 5.9 per cent yield.

The balance of Alpha’s portfolio is invested in three properties: a 30 per cent stake worth £17.1m (27.7p a share) in the H2O shopping centre in Madrid; £7.8m (12.5p a share) equity in an inflation-linked freehold industrial facility near Hamburg, Germany leased to industrial waste management group Veolia that produces a 6.3 per cent yield on equity; and a 47-room Travelodge in Lowestoft that was acquired last week for £3.1mn (5p a share) on a yield of 6.2 per cent. The lease to the budget hotel chain has 18 years remaining and is subject to inflation-linked adjustments.

Strip out Alpha’s £11mn (18p a share) listed equity portfolio and proforma net cash of £49.7mn (80.5p a share) from its 143p share price and effectively the property loan portfolio, Madrid, Hamburg and Lowestoft properties are in the price for 44.5p, or 61 per cent below their combined valuation of 116p.

For a company that has increased NAV per share by 75 per cent since I initiated coverage ('High-yield property play', 10 February 2016), returned surplus gains from disposals through attractively priced tender offers, and has a progressive dividend policy, the 34 per cent share price discount to book value is unwarranted. Alpha also offers inflation protection through index-linked income and scope for capital gains, too. Buy.

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