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Target small-cap deep value plays


I’ve always been on the sidelines of chasing the winners until a company’s valuation gets too stretched or the rationale for the initial investment changes.

A case in point is BP Marsh & Partners (BPM: 299p), a publicly traded insurance industry investment firm that has produced a total return of 275% (including dividends of 30.78p) since I first suggested d buy the shares, at 88p (Buying hyper value small caps”, January 22, 2012). Over the past decade, the company’s net asset value (NAV) per share has increased by 179%, from 166p to 462.7p. In the 12 months to 31 January 2022, net asset value increased by 11% to £166.6m, supported by a gain of 14.7 per gain on the portfolio of £149.3m of BP Marsh made up of 13 equity investments and net gains of £2.9m on three disposals which made £9.9. min.

Since the end of the financial year, BP Marsh has doubled its net cash to £17.4m (48p per share) by exiting Spanish insurance brokerage consolidator Summa Insurance Brokerage. The strong cash position will primarily be recycled to provide existing recipient companies with additional capital to make strategic acquisitions, chief executive Alice Foulk said. It’s a sensible strategy and one that should help deliver further double-digit increases in BP Marsh’s net asset value per share.

BP Marsh is strong for 2022 and beyond

  • Annual profit before tax up 42% to £19.4m
  • Net cash has doubled to £17.4m since the year-end in January
  • Cash to recycle to support targeted acquisitions by existing recipient companies
  • Proposed dividend rose 13.9% to 2.78p

BP Marsh’s consistent valuation creation reflects its ability to support early-stage insurance-focused investments, provide ongoing capital when needed, and ultimately realize gains on exit.

For example, BP Marsh’s £1.5m stake in AG Guard was increased to £3.5m 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. . Elders is one of Australia’s largest suppliers of goods and services to the agricultural industry, ranging from wool, grain and livestock trading to financing, banking, real estate and insurance.

Under the agreement, Ag Guard provides a specialist crop underwriting system and claims management service to the Elders branch network across Australia with insurance capability provided by QBE Insurance. The partnership has increased AG Guard’s gross written premium from A$7m to $40m (£22.9m) over the past 12 months, justifying the increase in valuation. It also means that BP Marsh’s 41% stake in Ag Guard has produced an internal rate of return of 53% since its investment in July 2019.

Another good example is Stewart Specialty Risk Underwriting, a Canada-based Managing General Agent (MGA) that provides insurance solutions to clients in the construction, manufacturing, land energy and transportation sectors. Founded by Chief Executive Stephen Stewart as a start-up in 2017, gross written premium is expected to reach C$70 million this year, up from C$50 million in 2021. Margins are also up and Stewart has the habit of “under-promising and over-delivering”, says Foulk, so expect exceptional growth in last year’s cash profit of C$4.5m (£2.9m). It’s not in the price.

Indeed, although BP Marsh’s 30% stake in Stewart Risk was increased by 43% to £8.1m in the latest accounts, this only implies a valuation of £27m for the entity. Stewart Risk is one of the beneficiary companies to which BP Marsh is seeking to provide acquisition capital, so it is possible that the company’s activity will accentuate future returns.

BP Marsh’s largest investment, a stake in Nexus Underwriting (since renamed Kentro), an independent specialist MGA that has grown through organic growth and acquisitions, appears ripe for involvement in some form of underwriting business. mergers and acquisitions over the next 12 months, too. The stake represented £5.4m (17.7pa share) of the £16.2m unrealized gains realized on BP Marsh’s equity investment portfolio in the 2022 accounts, placing a value of £51.5m on its fully diluted 19.05% stake, a reading through valuation of 15 times cash earnings.

So with the portfolio performing well and several owned companies valued at a single-digit earnings multiple – fast-growing Lloyd’s retail and wholesale insurance broker CBC presents itself as a candidate for further significant hikes. valuation – so I expect BP Marsh’s net asset value per share to easily break through the 500p level by next January.

Trading on an unwarranted 35% discount on share price to net asset value, I’m sticking to the 375p target I set at the start of the year (‘Exploiting a Small Cap Value Play”, January 17, 2022). To buy.

Looking for Alpha

  • Net asset value per share rises 4% to 216p in 12 months to 31 March 2022
  • Maintaining annual dividend of 4 pence per share fully covered by adjusted earnings per share (EPS) of 4 pence
  • Higher reported EPS of 13.3p reflects £5.9m of portfolio gains

Trust Alpha Real (ARTL:143p), a company that invests in high-yielding real estate and asset-backed debt and equity investments, achieved a record net asset value per share of 216p in the 12 months to March 31, 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, which was held in the accounts at zero cost. Following the sale of the asset in April, £5.9m was paid to Alpha to increase the net funds of £54.3m reported at year end.

Some of the cash is being used to grow Alpha’s £36.4m portfolio of 20 secured and mezzanine home loans, which have generated weighted average annual returns of 7.7 and 17.5%, respectively , over the 12-month reference period. Although Alpha recorded £2.6m in credit losses after two developers went into receivership, this is a rare occurrence as credit quality has been exemplary to date. Since the end of the financial year, Alpha has grown the loan portfolio from £7.4m to £43.7m (71p per share), the high risk-adjusted returns justify the investment.

Alpha also made four new investments in high yield listed equity funds, including GCP Infrastructure Investments, GCP Asset Backed Income Fundand Sequoia Economic Income Fund. The publicly traded equity portfolio is worth £11 million (18 pence per share) and generates a dividend yield of 5.9%.

The balance of Alpha’s portfolio is invested in three properties: a 30% stake worth £17.1m (27.7pa share) in the H2O shopping center in Madrid; £7.8 million (12.5 pa shares) in an inflation-linked freehold industrial facility near Hamburg, Germany, leased to industrial waste management group Veolia which produces a yield of 6 .3% on equity; and a 47-room Travelodge in Lowestoft which was acquired last week for £3.1m (5p per share) with a yield of 6.2%. The lease at the budget hotel chain has 18 years remaining and is subject to inflation-related adjustments.

Remove Alpha’s £11m (18p per share) listed equity portfolio and proforma net cash of £49.7m (80.5p per share) from its share price of 143p and effectively the mortgage portfolio, properties in Madrid, Hamburg and Lowestoft are in price by 44.5p, or 61% below their combined valuation of 116p.

For a company that has increased its net asset value per share by 75% since I launched the hedge (‘High Yield Real Estate Game’, February 10, 2016), has generated divestment capital gains through attractively priced takeover bids and has a progressive dividend policy, the 34% share price discount to value accounting is unjustified. Alpha also offers inflation protection through indexed income and capital gains opportunities. To buy.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Selection of stocks for profit can be purchased online at www.ypdbooks.com. The books are not sold by any other source and are priced at £16.95 each plus £4.50 postage and packaging [UK].

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