Bargain Shares 2024: Hidden value will soon boost this share price

The shrewd management team behind Aim-traded insurance sector investment company BP Marsh & Partners (BPM) has an enviable track record of delivering eye-catching returns for shareholders.

Founded in 1990 by chairman and 40.6 per cent shareholder Brian Marsh, the company has invested in 57 companies to date with mightily impressive results. Having raised £10.1mn net proceeds when listing the shares on Aim in September 2006, BP Marsh’s NAV had increased five-fold to £203.5mn when the company released interim results last summer. The only other capital raise in the 17-year period was a placing and open offer in July 2018 which raised £16.6mn. This means 90 per cent of the increase in shareholder value has been delivered through astute investments.

To put the performance into perspective, between January 2013 and July 2023 NAV per share quadrupled to 567p and the board paid out 36.43p a share of dividends, too. In the same period, the FTSE Aim All-Share index increased 36 per cent in value and the FTSE Aim Financials index delivered a 183 per cent return.

The key to the impressive outperformance is the uncanny ability of BP Marsh’s small investment team to back the management of early-stage insurance start-up companies, providing both equity and debt funding, and then reaping the rewards as these companies grow their businesses.

Eye-catching returns on disposals

A good example is last autumn’s disposal of the company’s 18.7 per cent stake in Kentro, an independent speciality managing general agency (MGA). The sale realised £51.5mn of cash proceeds for BP Marsh, which equates to an impressive internal rate of return (IRR) of 24 per cent and a 3.4 times money multiple in a nine-year holding period. This left the debt-free investment company with a portfolio of 14 investments and net cash of £51mn (142p).

The deal-making stepped up a gear at the end of last year when the directors announced two further major disposals. The first transaction related to BP Marsh’s 59.3 per cent shareholding in LEBC, the national independent financial advisory firm, which announced the sale of wholly owned subsidiary Aspira Corporate Solutions to Titan Wealth, the discretionary asset and wealth management business.

LEBC will receive cash proceeds over a three-year earn-out period and BP Marsh expects its total cash return to be at least in line with the company's most recent valuation of £15.9mn. It could be more as LEBC’s other major shareholder, Tavistock Investments (TAVI), notes that LEBC will receive a £20mn cash payment on completion of the Aspira disposal; the full earn-out could be worth £27.5mn. Additionally, BP Marsh’s directors expect to receive repayment of all its outstanding loans to LEBC, a total of £3.3mn. The transaction delivered a respectable IRR of 8.3 per cent over BP Marsh’s 15-year holding period.

A few weeks later, BP Marsh announced another divestment, selling its 43.8 per cent holding in Paladin, the parent company of CBC, the London-based insurance broker, to Specialist Risk Group, one of the fastest-growing insurance intermediaries in the UK, subject to regulatory approval. BP Marsh originally invested in Paladin as part of a management buyout (MBO) in February 2017, making an initial equity investment of £3,500 for a 35 per cent equity stake, and it has supported Paladin with loan funding. Paladin had outstanding loans of £5.9mn owing to BP Marsh at the time of the disposal.

Since making its investment, Paladin's cash profit has grown from a loss of £50,000 in 2016 to a forecast adjusted profit of £10mn in 2023. This explains why the value of BP Marsh’s 43.8 per cent stake was revalued up from £19.2mn to £30.5mn when the company reported interim results in October last year. BP Marsh is selling its stake for an initial cash consideration of £41.8mn, or £11.3mn (31.5p) above the July 2023 valuation. Furthermore, an earn-out could deliver cash consideration of £17.8mn (50p) based on Paladin generating 20 per cent cash profit growth in 2024 and 2025.

The sale of the stake in Paladin boosted BP Marsh’s net cash to £93.7mn (261p), a sum that backs up 57 per cent of its market capitalisation of £165mn, and it added 31.5p a share to last reported NAV of 567p. It guarantees yet another bumper set of results when BP Marsh announces its annual results to 31 January 2024.

Moreover, Specialist Risk Group will repay the £5.9mn loan outstanding to BP Marsh. The cash pile is set to grow even higher still given that it excludes the initial cash proceeds BP Marsh will collect from LEBC’s disposal of Aspira to Titan Wealth and the repayment of the £3.3mn loan it made to that company.

Pro-forma NAV estimates

Effectively, BP Marsh’s pro-forma NAV of £214.8mn (598p) includes £93.7mn of cash, £9.2mn of loans due for repayment from the Paladin and LEBC transactions, the £15.9mn equity stake in LEBC that will be turned into cash in due course, £87.8mn of other equity investments and £4.5mn of loans made to those investee companies. In addition, BP Marsh has recently made a £1.6mn investment in a new portfolio company, Ai Marine Risk, a London-based MGA that specialises in marine hull insurance with a strong focus on the UK & Europe, Middle East and Asia-Pacific regions.

I wouldn’t bet against BP Marsh’s NAV per share surging through the 600p barrier at its next results either. That’s because the well-diversified portfolio offers geographic exposure to North America, Canada, Australia, Singapore and the UK market, so its investee companies will be benefiting from the ongoing rise in global property and casualty market rates.

Multiple portfolio companies offer further valuation upside

For instance, portfolio company Lilley Plummer Risks (LPR), a specialist marine Lloyd’s broker, continues to perform well, with premium income increasing and insurer loss ratios tracking lower than in previous years. The uncertainty caused by the war in Ukraine and tensions in the Arabian Gulf has led to elevated premiums, too. LPR’s expansion into niche and diverse areas (political violence, terrorism and property and casualty insurance) has proved a prescient move, as has the addition of a new North American property team, which is outperforming.

BP Marsh’s 30 per cent stake in LPR was last valued at £8.9mn, or 29 times invested capital, a valuation that reflects a five-fold rise in LPR’s cash profit to £2mn in the past two years and its strong operational performance.

Other investee companies that could deliver valuation uplifts include XPT Group, a US-based speciality-lines insurance distribution company that has been growing organically and by some well-timed acquisitions. BP Marsh’s 27.3 per cent stake in XPT has a carrying valuation of £33.4mn, or three times cost, a reflection of the profitability of a business that increased gross written premiums (GWP) by 40 per cent to $700mn (£550mn) in 2023. Expect bumper growth this year, too.

In addition, BP Marsh holds a valuable 30 per cent stake worth £11.9mn in Stewart Speciality Risk Underwriting, a Canadian-based MGA that provides insurance to clients in the construction, onshore energy, transportation and manufacturing sectors. Since 2020, the business has doubled cash profit to CA$7.8mn (£4.6mn) and BP Marsh’s directors expect GWP to increase by at least 20 per cent to CA$100mn this year, an outcome that should drive further valuation uplifts.

BP Marsh has also been making hay Down Under with its investments in Sydney-based Ag Guard, an agricultural-focused MGA; Melbourne-based ATC Insurance, a MGA specialising in accident and health, motor and sports insurance; and Sydney-based Sterling Insurance, a specialist underwriting agency specialising in the mining, construction and demolition insurance markets. Equity stakes in the three investee companies account for £27.2mn of BP Marsh’s pro-forma NAV of £214.8mn.

Share price discount set to narrow

Net of cash on the balance sheet, BP Marsh’s investments are in the price for 50 per cent below their carrying value, a bargain basement rating for a company that has quadrupled NAV per share in the past decade and one set fair to deliver strong returns in the future.

For good measure, the board has recently committed to hike the payout from 4.1p to 11p for at least the next three years, and is set to release a pre-close trading update that should be well received. Buy.

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