BPM is an investor in financial services intermediaries. The company not only backs these investments with equity but also with loans where needed.
Investments are normally for the mid term with an average holding period of 6.4 years.
Over time not all the investments have been successful though the company has compounded asset growth a rate of 11.7% (excluding share issuance proceeds) since it floated.
The company has kept its management team with limited turnover. I would be concerned if the turnover increased, though there does seem to be moves to develop more junior staff into senior investment roles.
Over time the company has been able to divest various stakes for decent returns and these disposals have not routinely been at significant discounts to their appraised carrying value. More normally disposals have been above the internal valuation. The company has not been afraid to write down carrying values to nil. As such I am reasonably prepared to go with the carrying value on the books.
Given I am prepared to largely accept management’s valuation of the carrying value of the assets I see BPM as a fairly simple company for the investor.
The key questions being,
- What is the book value of the company?
- Is their headroom in the cash or facilities or might there be another cash raise?
- Are the valuations sensible?
- What is the discount between the company’s claimed value and its market cap?
- Currently management give a book value of £130m. Of which £107m is investments.
- Cash has come down from circa £8m at the YE to £1.4m now. The company also has a £3m loan facility with a company controlled by Mr Marsh. This does concern me a little as the company needs cash to make investments. It could stand still but realistically it is hard to see that appealing to its management. This means that it is probable that unless there is a realisation there will be no future dividend and possibly a requirement for more cash. Given the performance of BPM I am not concerned about participating in this, but am conscious that it may be set up for only significant participants and management and at a discount. The two companies both previously touted for realisation Nexus and LEBC are now being talked about much more in the mid term. That being said the last set of shares were offered to retail investors and the discount was only 2.7% to the average price of the previous 60 days.
- As I have said before the valuations have proven to be sensible in the past. However LEBC which was valued at £35,485,000 at the YE has been reduced to £23,859,000 following a well publicised withdrawl from giving defined benefit pension advice. Whilst this devaluation seems very fair given what is known about the business LEBC has walked away from, it may not fully reflect further legal risk over misselling. I am in no position to value this risk but believe it needs to be factored into a valuation, (a known unknown).
- The company with a book value of £130m has a market cap of £ 102m.
Given the market cap to book value discount is well over 20% I would normally say that BPM is ripe for further investment. However should I devalue LEBC by £5-£10m to reflect litigation risk or should I put in a 5% discount for new share issuance (a company that needs further funding is not one of Warren Buffet’s best buy criterion), then the MoS gets much closer, possibly even below 20%.
That being said BPM is increasingly investing in the USA and Australia which may be beneficial diversification (though its South African and Singaporean forays have not gone well).
As such I have BPM on my slight buy list. I might put money into it if there is no better idea available, but at the moment I think I have a better idea.