UK share tips: B.P. Marsh & Partners PLC
I have just invested in B.P. Marsh & Partners PLC with
the intention of making an 8% capital return in a short space of time by taking
advantage of a small arbitrage opportunity. The details of the trade were as follows:
Stock ticker: BPM:LN
Market: UK AIM market
20/04/18 share price: 253 pence
Target sale price: 273 pence
Company background
B.P. Marsh & Partners PLC (BPM) was founded by Brian
Marsh as a listed investment vehicle with which to make private equity investments
i.e. invest in businesses that aren’t listed on a public stock market. The
sector focus for BPM is early stage financial services businesses with a
geographical focus of the Western World.
Investment thesis
As BPM is an investment vehicle then the value of the
company is largely driven by the value of the underlying investments. BPM has net
assets of over £79 million per the 2017 Financial Statements, yet is trading at
a market value of £73 million. The target sale price of 273 pence reflects the
assumption that the market price should trade at the same value as the
underlying investments.
Valuing an investment company
In the case of BPM the market price is only 92% of the net
asset value. You might expect that investment companies should be worth
whatever the value of the underlying assets. However, the reality is that often
the investment company is worth even more than the underlying assets. This is
because the market price also reflects a premium for the quality of the
investment manager.
Take for example one of the world’s greatest investors
(arguably an unfair comparison). Warren Buffett’s investment vehicle currently
trades at about 140% of net book value. Hence, the value of the investment
vehicle (Berkshire Hathaway Inc) is somehow worth more than the total of the
underlying assets after debt. The reason for this discrepancy is because
Buffett is considered one of the world’s greatest investors and as such,
investors are happy to pay a premium to have Buffett direct future investments
and ultimately the future growth of the company.
Measuring the risk
It’s quite possible that the market will not recognise the
book value of the shares in the market price. Furthermore, the market may take
the view that BPM management have and will make poor investment decisions. In
this case, the downside is somewhat mitigated by several factors:
1)
The track record of the company has been strong
and the return on capital employed has been greater than 30% - an impressive
number when compared to the vast majority of companies listed on the AIM market
2)
The company has committed to buying its own
shares if the market value ever falls below 75% of book value
3)
Given that company annual reports are historic,
the true net asset value of the investments are likely to be higher than those
reported several months previously
4)
Even if the private equity investments have
grown in value over time accounting rules prevent BPM from increasing the
investment book value that they record on their Balance Sheet. As such, the
true value of the investments are more than likely going to be higher than
those reported
Wish me luck and I’ll follow up with another article once I’ve
closed the position – be it good or bad news.
Please note that the above represents my thoughts and
opinions on the company. Should you be interested in investing in shares then I
suggest that you seek advice from a finance professional.
Feel free to share and challenge my thoughts in
the comments below.
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