- Assets under management (AUM) surge £761m (19 per cent) to record £4.7bn in first half.
- AUM organic growth of £457m (12 per cent).
- Post period ended oversubscribed £100m equity raise for Gresham House Energy Storage Fund.
- Second sustainable infrastructure fund to launch in the second half.
Gresham House (GHE:915p), a fund manager specialising in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, has delivered eye-catching organic growth in assets under management (AUM). Buoyed by double-digit organic growth in six months to 30 June 2021, closing AUM of £4.7bn is only £100m shy of analysts’ year-end estimates.
True, the earnings accretive acquisition of Republic of Ireland-based Appian Asset Management for an initial €4.55m (£4m) completed at the end of June and added AUM of €396m (£340m), including a forestry portfolio. However, Appian also delivered £37m AUM organic growth since the acquisition was announced at the end of December.
Appian not only offers Gresham House a vehicle to expand its overseas presence, but it also plans to launch a social housing fund in Ireland that is complementary to Gresham House's recently launched Residential Secure Income (ReSI) LP fund, targeting the shared ownership housing market to unlock a supply of more affordable houses. Gresham House ReSI LP fund has £70m of commitments to date, and “a strong pipeline to support further fundraising in the second half.” It’s not the only part of the business firing on all cylinders.
The group’s British Strategic Investment Fund is now fully committed and is on track to launch a second fund by the end of the year. Gresham House Energy Storage Fund (GRID), the largest listed specialist fund in UK energy storage systems has launched and closed a fundraise of £100m since the start of the second half, further highlighting Gresham House’s strong ESG credentials (more than 50 per cent of revenue is derived from environmental solutions).
For instance, Gresham House is the UK's largest commercial forestry manager, harvesting 10 per cent of the UK's softwood annually and managing 140,000 hectares, worth more than £1.8bn. It has also just been appointed as asset manager for a 24,800-hectare Australian forestry investment, Green Triangle Forest Products, which AXA Investment Management is acquiring on behalf of clients. Gresham House acted as the advisor for AXA in relation to this transaction, too, further cementing its relationship.
The directors look incredibly well placed to achieve their 2025 targets: increase AUM to £6bn; earn a return on invested capital of 15 per cent; and generate an operating margin of 40 per cent. From my lens, the forecast risk looks heavily skewed to the upside given the operational leverage in Gresham House’s business model, and the fact that AUM growth continues to outpace forecasts. I view analysts’ predictions of 32 to 40 per cent pre-tax profit growth (2021-2023 forecast period) as conservative, but even if you don’t factor in any outperformance the shares are still attractively priced (cash adjusted price/earnings ratio of 18 and enterprise valuation to cash profit multiple of 15 for 2022). Peers including Impax Asset Management (IPX) enjoy earnings multiples 50 per cent plus higher on both measures, and there is scope for Gresham House’s ratings discount to narrow.
I included the shares, at 312p, in my 2016 Bargain Shares Portfolio, and last advised buying at 820p when I covered the annual results (‘Riding earnings upgrade cycles’, 12 March 2021). The price duly hit my 950p target in late May. However, after factoring in the better than expected growth in AUM, I am raising my target to 1,000p ahead of interim results in September. Buy.
Kape’s buying opportunity ahead of results
- Trading in line with guidance that indicates doubling of full-year operating and pre-tax profit to US$70.8m and US$64.3m, respectively.
- Integration of Webselenese ‘progressing well’ and average customer acquisition costs reduced.
- Core privacy division recorded 17 per cent revenue growth in first half.
Cyber security software provider Kape Technologies (KAPE: 303p) continues to increase its customer base, cross-sell products, integrate acquisitions and enter into new lucrative revenue generating agreements.
Buoyed by the earnings accretive acquisition of Webselenese, an independent digital platform that provides 8.5m users with unbiased insight driven content focused on cyber security and privacy trends (‘Tap into an eye-catching earnings cycle’, 8 March 2021), Kape expects to report 60 per cent higher revenue of US$95m and 79 per cent higher cash profit of US$28.7m in the first half. On a proforma basis, revenue and cash profit are up 27 and 20 per cent, respectively.
Chief executive Ido Erlichman reports positive momentum in the group’s core privacy division (17 per cent revenue growth) and digital security segment (9 per cent growth), supported by a “growing number of customers choosing to take more than one of Kape’s products.” Three-quarters of Kape’s revenue is derived from North America and Europe, affluent regions that are key targets of online fraudsters, so it’s hardly surprising that adoption of Kape’s cyber security software (which protects data security and privacy against piracy and phishing attacks), and virtual private network (VPN) solutions (which encrypt and secure internet connections) has been rising strongly, too.
It’s a global trend and one that Kape is tapping into. For instance, the group’s subsidiary, Colorado-based Private Internet Access (PIA), has entered a content provision agreement with cellular operator 3 Hong Kong to offer its award-winning VPN product to the group’s customers. This is the first co-operation between PIA and a telecom operator.
It’s worth pointing out that there is mergers and acquisition interest in the sector. Avast (AVST) is in advanced discussions regarding a possible merger with NortonLifeLock Inc. Kape could be of interest to predators, too. That’s because analysts at Progressive Equity Research expect net debt of US$77m at the end of 2021 to be completely paid off from free cash flow of US$80m (35¢ a share) next year, so effectively Kape is being valued on 10.5 times 2022 operating profit estimates to enterprise valuation, or almost half the forward rating of Avast. Kape also offers an attractive 9 per cent free cash flow yield for 2022.
Kape’s shares have produced a 538 per cent total return since I included the shares, at 47.9p, in my 2017 Bargain Shares portfolio. Offering a further 25 per cent upside to my 375p target price, I remain a buyer ahead of September’s interim results. Buy.
Finally, I have also published an update on 2018 Bargain Shares Portfolio constituent Sylvania Platinum.
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