Dividends, buybacks and an unwarranted discount

Aim-traded insurance sector investment company BP Marsh & Partners (BPM:354p) has reported record NAV and has significantly bolstered its cash position post the year-end, too. The recently announced disposal of the group’s largest investment, an 18.7 per cent stake in Kentro, an independent speciality managing general agent (MGA), will realise £51.5mn in cash, or 3.4 times the group’s total capital invested.

The ability of BP Marsh’s shrewd investment team to back the right management of early-stage investee companies has provided some eye-catching gains over the years, hence why NAV per share has more than trebled to 526p since I first suggested buying the shares, at 88p (‘Hyper value small-cap buy’, 22 Jan 2012). For good measure, the board has paid out total dividends of 34.95p per share, too, rewarding shareholders with a 342 per cent total return, or 14 per cent annualised growth.

The disposal of Kentro was in line with last year’s carrying value and means that the group now holds pro-forma net cash of £55.2mn (153p), £16.1mn (44.7p) loan portfolio and equity portfolio across 15 investee companies worth £120.4mn (334p). The plan is to return £13mn by doubling the annual dividend to £2m (5.78p) over the next three years, pay a special dividend of £1mn (2.78p) and return £6mn through NAV per share accretive buybacks. The rest of the cash will be invested in an exciting pipeline of new investments.

Conservatively valued portfolio

There were some striking gains in BP Marsh’s equity portfolio last year, no more so than the 104 per cent uplift to £19.2mn (53p) in the value of the group’s 47 per cent stake in CBC, a retail and wholesale Lloyd’s insurance broker. It’s justified, too, as CBC’s cash profit increased 73 per cent organically to £3.8mn and BP Marsh is “confident that CBC will exceed its £5.5mn budget for the current year”.

On this basis, the investment is valued around eight times cash profit estimates to enterprise valuation, a modest rating that offers considerable scope for multiple expansion. Expect another hefty valuation increase in the next set of results. There is potential for corporate activity, too, as chairman Brian March revealed during our results call that “CBC is a likely target for bigger organisations”, adding that it could attract “a bid or two in the next 12 months”.

The group also holds a 30 per cent stake in Lilley Plummer Risks (LPR), a specialist marine Lloyd’s broker that has expanded into niche and diverse areas including political violence, terrorism and property and casualty insurance. Since the group invested £1mn in October 2019, LPR has trebled revenue to £5.2mn and delivered 71 per cent higher cash profit of £2mn last year, hence why the holding almost trebled in value to £7mn (19.4p) in the 12 months to 31 January 2023. The eye-catching performance is being driven by strong organic growth as LPR grows its client base and wins new business in response to demand for coverage in war-stricken locations.

Unwarranted share price discount to NAV

Despite the hefty cash position post the disposal of Kentro and an enviable track record of delivering hefty gains on exits, the shares trade on a 33 per cent discount to NAV. On a cash-adjusted basis, the equity and loan portfolios are effectively in the share price for 46 per cent below the underlying value of the investments. The discount is even more anomalous given the prospects for double-digit growth in NAV in the next 12 months, driven by the profit growth of investee companies and corporate activity.

The holding has delivered an 18.4 per cent total return since I covered the annual results a year ago (‘Targeting small-cap deep value plays’, 13 June 2023), during which time the FTSE Aim All-Share Total Return index has shed 10 per cent of its value. The fundamental strength of the business suggests the outperformance is highly likely to continue. From a technical perspective, a chart breakout above the 363p all-time high (February 2022) is worth noting as it opens the door to a rally to my 450p price target. Buy.

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