BP Marsh discount narrows again

Insurance sector investor BP Marsh trades at a big discount to net asset value (NAV). We said so last year and believed it was "unfair". That discount has narrowed since, and investors have made big profits, but there's a clear argument for further progress here.

In the six months to 31 July, NAV grew to 253p, or £73.8 million, up 4% from 243p in January and 225p a year ago. Profit after tax leapt by almost 20% to £4 million, but it is NAV that's the most widely followed metric.

And, here, BPM's track record is good. It typically invests up to £3.5 million for 15-45% of a business, usually insurance-related or fintech, which it holds for eight years on average. Since it was set up by Brian Marsh in 1990, it's generated average annual compound NAV growth of 11.3%.

The private equity firm traded at a discount of as much as 45% as recently as four years ago, and it was 35% in 2015. Paying dividends, share buybacks and improving communications has narrowed that to around 21% currently, but Barrie Cornes at house broker Panmure Gordon is optimistic.

"With an average annual compound NAV growth rate of 11.3% since 1990 and a 1.9% dividend yield we believe that a target price based on a 12.5% discount to NAV is realistic and achievable on a 12 month view," he says.

"We consequently maintain our 'buy' recommendation but increase our target price to 221p/share from 208p previously."

There have been a few disappointments over the past six months. Marsh has written down the value of Summa, a chain of Spanish insurance brokers, and UK car insurer Walsingham flatlined during the period after a previous writedown.

But there were clearly some star performers this time, including South Africa's PLUM, which specialises in large corporate property insurance risks. An initial 20% stake has been revalued higher and Marsh has just bought a further 22.5% of the business.

Management told Interactive Investor that more deals are likely, possibly in the US, by year-endInsurance intermediary Besso and Nexus, one of the largest independent speciality Managing General Agents in the London market, are also worth more to Marsh than they were six months ago.

With £7.9 million of net cash to spend, Marsh has plenty of opportunities, despite the Brexit vote in June. In six months, Marsh reviewed 45 possible new investments versus 71 in all of the previous year. Management told Interactive Investor that more deals are likely, possibly in the US, by year-end.

A dividend of 3.76p is payable this time, a level that bosses plan to maintain for the next couple of years.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.