(BRT) Brightside Grp

Is this ahead of results?

Small caps round-up:
Fri 27 Jan 2012
http://bit.ly/y8olzS

Brightside Group - Strategic development Click for report
http://www.edisoninvestmentresearch.co.uk/researchreports/Brightside051211update.pdf
Mon, Dec 5, 2011 at 4:31 PM

Brightside is proposing to acquire the businesses that supply and maintain its online distribution in a move that will secure access to these crucial systems and further simplify the group structure. This move has been flagged for some time, but by proposing to act now, Brightside has negotiated a lower price than implied by its 2009 option agreement and has agreed with the related party vendor that the proceeds will be used to support the amount of underwriting capacity made available to Brightside’s broking division.

Brightside Group’s principal activities are insurance broking, the provision of premium finance, and the supply of medical and other reports to the legal profession. It is also engaged in lead generation, online distribution technology, and the provision of debt management solutions.

Year
End Revenue
(£m) PBT
(£m) EPS
(p) DPS
(p) P/E
(x) Yield
(%)
12/09 44.7
8.2
1.77
0.0
9.9
N/A
12/10 66.2 12.3 1.85 0.0 9.5 N/A
12/11e 79.2 17.9 2.74 0.0 6.4 N/A
12/12e 88.6 18.6 2.84 0.0 6.2 N/A
Brightside Group is a research client of Edison Investment Research.

According to the shareholder bulletin prior to general meeting on 23rd December 2011.

Every policy sold by the eCars business in 2010 has paid £16.44 to the software house which was owned by the founding Directors.

A total of £ 6.3 million in royalties in that year. Profit by the software house was stated to be £ 4.6 million in that year.

If the 2009 option to purchase the software house had been exercised it would have cost a whopping £ 31.6 million based on the policy throughput since the eCars business was purchased.

If the Directors wished they could have exercised that option but chose instead to agree a much smaller figure .

The fact is that the timing of this purchase is absolutely influenced by the need for S.R.I.C.L who historically underwrite 85% of the eCars policies to obtain further capitalisation in order to be able to write future business at a capacity which the growing eCars will require.

There is a shortage of underwriting capacity within personal lines at the moment as Insurers seek to make their own offerings before passing capacity to brokers. That is the reason that the present Directors have been working hard to bring on other sources of underwriting capacity which appears to be taking shape albeit with a slowish but promising start at 15% of eCars business.

As I read it all of these acquisition funds are destined for S.R.I.C.L and once home will be leveraged with a reinsurance partner to provide underwriting capacity to the Group which of course will benefit the small shareholders in the long term.

From my continued analysis the company runs its business in the most efficient manner and from the point of view of taking steps to protect underwriting partners from application fraud is absolutely doing it the right way and through this will see other Insurers keen to take their paper in the future.

Their taking on further exposure on the balance sheet to the profitable premium finance is a good pointer to profits increase in the future.

The only aspect of the business which is to me not a good fit is the medical reporting service which is not at all cash generative but perhaps balances that with some degrees of goodwill to prospective Insurance partners but has a huge downside in the long delays before payments are made. Personal injury claims and associated services are in my view not a good place to be in the long term.

There is only 17% of the issued share capital not owned by the founding Directors and their institutional supporters and they are in my view not in this for the short term sale of assets which they as the founding directors previously owned.

Any hit on the share price hits these Directors personally more than any other class of shareholder.

There appears to be a clear long term growth plan albeit no real sight or promise of dividends but certainly some share price enhancement for small players like myself to earn and trade on over the coming two years.

My company writes software specifically for the automotive and insurance sectors and to put into perspective this current purchase I can categorically state that any class of software which my business licensed that was earning £4.6 million of profit each year would not be sold for less than £45 million.

Good luck to all those who are in this share. My view is it has a very strong future and I will certainly be holding as well as adding to my small shareholding over the coming months.