17 June 2015
By Maynard Paton
Today I’m continuing my hunt for Watch List shares with a look at BP Marsh (BPM).
Here are the initial attractions that prompted this research:
Lowly valuation: The shares trade at a 28% discount to the group’s net asset value
Appealing history: Book value has reportedly grown at an 11% annual average since 1990
Owner management: The present boss established the firm and boasts a 63% shareholding
As usual, I’m applying a question-and-answer template to help me pinpoint companies that match the criteria set out in How I Invest. I’m looking for as many Yes answers as possible.
Activity: Venture capital provider
Share price: 155p
Shares in issue: 29,167,000
Market capitalisation: £45.2m
Does the business boast a respectable track record?
BPM was established in 1990 when it invested £2.5m in a handful of early-stage businesses involved within the financial-services sector.
By 2005 the group had made 25 investments, of which 14 had been exited at returns ranging from 36,000% to -100%. During the same time, BPM’s net asset value (NAV) had swollen to £29m — equivalent to a 17% annual compound gain.
BPM joined AIM during 2006 to raise a net £10m for further investment. Fast forward to 2015 and results earlier this month showed 13 current investments and a NAV of £63m.
Progress as a quoted company has generally been positive, with the last five years showing consistent NAV uplifts. The difficult years were 2009, which showed an annual loss after the banking crash hit the firm’s investments, and 2010, when the dividend went missing:
|Year to 31 January||2011||2012||2013||2014||2015|
|Net asset value (£k)||46,476||50,121||55,455||58,923||62,971|
|Net asset value per share (p)||159||171||190||202||215|
|Realised gains (£k)||350||(20)||5||12||-|
|Impairment of investments (£k)||(446)||(339)||-||-||-|
|Unrealised gains (£k)||2,971||4,592||6,130||3,744||5,109|
|Carried interest movement (£k)||(7)||32||5||97||-|
|Dividends received (£k)||599||661||301||368||432|
|Income from loans (£k)||599||859||929||1,402||1,789|
|Fees receivable (£k)||820||594||855||486||575|
|Total operating income (£k)||4,886||6,379||8,225||6,109||7,905|
|Operating expenses (£k)||(1,837)||(1,817)||(2,007)||(1,987)||(2,161)|
|Exceptional item (£k)||-||(30)||-||-||-|
|Exchange movements (£k)||(10)||(51)||37||(108)||(244)|
|Net finance income (£k)||28||36||48||86||44|
|Pre-tax profit (£k)||3,013||4,377||6,195||4,074||5,899|
|Earnings per share (p)||8.90||12.40||19.40||13.10||16.90|
|Dividend per share (p)||-||1.00||1.25||2.75||2.75|
Has the business grown mostly without acquisition?
BPM is a pure venture-capital group and has not acquired any business outright since its flotation. Investments are generally limited to between 15% and 45% of the investee’s company’s equity.
Has the business mostly self-funded its growth?
Following the aforementioned £10m raised at the flotation, BPM has not received any further external funding. At the last count, 80% of the balance sheet was represented by booked profits or paper gains from investments.
Does the business possess an asset-strong balance sheet?
The 2015 balance sheet carried equity investments of £39m, loan investments of £15m, cash and fund investments of £8m, and no debt. The books carry no pension obligations as well.
Does the business convert profits into free cash?
The last five years have seen tiny amounts of cash spent on capital expenditure and absorbed into working capital:
|Year to 31 January||2011||2012||2013||2014||2015|
|Total operating income (£k)||4,886||6,379||8,225||6,109||7,905|
|Depreciation and amortisation (£k)||22||23||8||6||7|
|Cash capital expenditure (£k)||(6)||(4)||(1)||(17)||(7)|
|Working-capital movement (£k)||(89)||(75)||(74)||430||(413)|
Does the business enjoy a competitive advantage?
According to BPM, the group’s successful track record is based on “a number of factors that includes a robust investment process, management’s considerable sector experience and a flexible approach to exit”.
Apparently, BPM’s management boasts “a considerable bank of experience in the financial services sector and seeks to use this experience to add value to its investments. It is also able to provide consultancy and administrative services to its portfolio of investments when required.”
What’s more, BPM “does not seek to impose exit pressures on its investee companies, but prefers to work with management to develop a mutually acceptable exit route.”
I suppose all that could lead to greater returns.
For what it’s worth, BPM reckons it has held its current holdings for an average of seven years. The earliest investment still held today was made way back in 1995.
Does the business produce a respectable return on equity?
Between 2007 and 2015, BPM’s NAV advanced from £40.6m to £63.0m — a compound average growth rate of just 5.6%.
Add in the dividends of £1.8m paid during that time as well, and the average growth rate comes to 6.0%.
It does seem to me that BPM’s NAV growth rate — i.e. the returns it has enjoyed on shareholders’ equity — has slowed significantly since its flotation.
I mean, between 1990 and 2005, BPM’s reported NAV growth rate was 17% — whereas now the group claims its NAV growth rate between 1990 and 2015 is 11.3%. That indicates the growth rate between 2005 and 2015 is roughly 6% or 7% — in line with my sums above.
It looks as if BPM’s returns have been depressed somewhat by its operating expenses.
Look back to my first table above and you will see operating expenses for the last five years have totalled almost £10m, while aggregate operating income over the same period came to £34m.
In other words, a chunky 30% of BPM’s investment gains and income have been absorbed by employee wages and other costs.
Another angle is to compare annual operating expenses to NAV — here, annual operating expenses have reduced group NAV by about 4% a year since 2009. This level of ‘management charge’ feels high to me.
Does the business employ capable executives?
Current chairman Brian Marsh established BPM back in 1990 and has been in charge ever since. He looks to be a loyal and safe pair of hands, although succession planning is something prospective investors will have to consider — Mr Marsh is in his 70s.
Mr Marsh is accompanied by four other executives, only one of whom (the finance director) has served on the board since the flotation.
Does the business employ good-value-for money executives?
Mr Marsh collected a very reasonable £125k basic wage during 2014 and has never received a bonus or pension contribution during BPM’s quoted history.
Mr Marsh’s relatively low-ish wage may be due to the appointment of other executives to spread the workload (back in 2012 he earned £190k). I also wonder if the reduced pay is signalling Mr Marsh can see his retirement on the horizon.
Among the other executives, basic pay looks acceptable — although they are paid annual bonuses every year and such payments don’t seem to relate to that year’s financial performance. That’s quite annoying, and something to bear in mind when considering the aforementioned level of operating expenses.
Does the business employ owner-orientated executives?
Mr Marsh boasts a 63%/£29m stake — a shareholding that has remained largely unchanged since the flotation.
I’m particularly impressed by how Mr Marsh has used part of his own shareholding to entirely back the group’s option scheme. About 5% of the existing share count are earmarked as staff options — and the vesting of these options will not cause any dilution.
Does the business enjoy reasonable growth prospects?
The 2015 results revealed BPM had received 59 “relevant new investment proposals” to evaluate, so opportunities do not seem to be in short supply.
The firm has also noted the growing M&A activity within the Lloyd’s insurance market, and confirmed “transactions involving the larger companies within the [Lloyd’s] insurance market tend to create opportunities for the Group either directly or via its investee companies”.
Plus, the latest results said the firm “looks forward to the year ahead with confidence and this is reflected in our aspiration to maintain a dividend of at least 2.75p per share in the current year.”
Does the share price stand a good chance of becoming a bargain?
It already looks a bargain.
The latest NAV is 215p per share, which is 39% greater than the 155p share price.
However, BPM’s shares have consistently traded at a discount to NAV since mid-2007. At the bottom of the banking crash for instance, the shares hit 50p versus a then-reported NAV of 156p per share.
The aforementioned low compound growth rate of 6% is perhaps one reason why investors currently demand a price discount for a BPM’s balance sheet.
Another possible reason could be the nature of BPM’s investment assets.
The group’s equity investments are summarised below:
The big success story has been Hyperion, an insurance intermediary, which has seen its market cap surge almost 8-fold since 2007:
|BPM holding (%)||27.9||19.5||2.24|
|BPM holding (£k)||11,999||29,368||7.310|
|Implied market cap (£k)||43,007||150,606||326,339|
But not every investment owned by BPM has performed so well. Besso (a Lloyd’s broking group) for instance has seen its implied market cap decline substantially before recovering…
|BPM holding (%)||23.6||22.7||37.9|
|BPM holding (£k)||12,113||5,005||10,899|
|Implied market cap (£k)||51,435||22,019||28,727|
…while Summa (a Spanish insurance broker) has seen its implied market cap rise substantially before declining!
Summa 2007 2011 2015
BPM holding (%) 35.0 48.6 77.3
BPM holding (£k) 1,050 5,098 4,326
Implied market cap (£k) 3,000 10,483 5,600
An interesting investment is LEBC, an IFA network, which has seen its implied market cap rise consistently during the last few years:
|BPM holding (%)||22.5||22.0||34.9|
|BPM holding (£k)||2,266||3,277||6,983|
|Implied market cap (£k)||10,071||14,929||20,003|
Trouble is, the 2014 accounts for LEBC show earnings of only £840k, which suggests BPM has valued its stake at about 24x trailing profits.
True, LEBC did lift its operating profits by 43% last year, but then again this outfit is growing from a low base (profits were just £3k in 2009). I think a 24x multiple for this unquoted business looks quite rich.
Is it worth watching BP Marsh?
This is a difficult one.
On the plus side, BPM is a straightforward investment business with a steady record of growing its NAV. Just as important, the group offers a loyal and time-tested boss who appears to be on the side of shareholders. Plus the share price does look cheap — at least on the surface.
However, I do have some doubts here.
First, the 6% or so compounded NAV growth since 2007 feels a tad lacklustre. The rate of growth since the bottom of the banking crash — NAV has risen 43% since January 2009 — is especially disappointing given how the wider stock market has rallied during the same time.
Second, the pedestrian growth rate has been partly due to BPM’s operating costs running at about 4% of NAV. I wonder if BPM, as a relatively small-scale investment business, will always find its running costs to be relatively high — to the detriment of shareholders.
Third, BPM’s track record appears to be dominated by the success of Hyperion. Strip out that 8-bagger from the NAV performance of 2007-2015 and the growth rate could easily come close to zero. So I get the impression a fair few of BPM’s investments have not performed that well.
Fourth, investors here are dependent ultimately on the progress of a handful of unquoted businesses — and a lot rests on BPM’s verdict on their valuation. Sadly, the only accounts I can find among BPM’s major holdings are those for LEBC, which signal a trailing P/E of 24.
(I had hoped BPM’s holdings were valued at lowly single-digit multiples, whereby incoming shareholders could potentially enjoy a ‘double whammy’ of buying in at a discount to NAV… and that NAV being undervalued as well.)
All told, BPM looks to be an uncomplicated, respectable business and it would be a shame to dismiss such an owner-orientated leader as Brian Marsh.
But unfortunately I’ve found just too many drawbacks to BPM that will always niggle me as a shareholder. So I am minded to pass on the share for now, although I acknowledge that more time studying BPM may yield greater insight into its investments and the current share-price discount.
In the meantime, it will be fascinating to see whether any of BPM’s current crop of investments can evolve into ‘the next Hyperion’. Fingers crossed for current shareholders!
Disclosure: Maynard does not own shares in BP Marsh.