1st Jun 2022 14:19
(Alliance News) - BP Marsh & Partners PLC is poised for a breakout, stockbroker Jefferies said on Wednesday, with the firm set to benefit from a rise in insurance intermediary profits.
Shares in BP Marsh were up 4.2% in London on Wednesday afternoon at 301.00 pence each, but have slid back 8.2% in 2022 so far.
Jefferies is initiating the firm, which invests in early stage financial services businesses - predominantly insurance broking firms - at a 'buy' with a price target of 380 pence.
"With global non-life insurance prices rising for their fifth consecutive year, the revenue, margins and earnings of brokers - earning brokerage fees proportional to premiums - and managing general agents - earnings profit commission on risks written for insurers - are in a cyclical upswing," Jefferies explained.
"Moreover, with the bond yield cycle still near multi-decade lows, fee-based income - such as broking and underwriting with third party capital - warrants a higher valuation than capital intensive business - such as a wholly-owned insurer."
As a result, BP Marsh could be in line to benefit.
Jefferies continued: "Whilst the group was not immune to the impact of the pandemic, we believe that the additional discount, since 2020, should unwind. Crucially, the only notable impairment - of GBP3.4 million - was of EC3 Brokers, largely as it specialises in Event Cancellation broking, which has suffered from an absence of events to insure.
"The group's other holdings have proven to be resilient and the group's management were even able to cut expenses, thereby preserving cash. Given that the pandemic's impacts are now known, we believe that the pandemic related discount should unwind, lifting the multiple to 2019 levels."
In early February, BP Marsh noted a positive trading period in year ended January 31, 2022, with many realisations being made in the second half, leading to an increase in liquidity and an anticipated cash balance of GBP18.2 million, once the sale of Summa Insurance Brokerage SL is completed.
For the year, it will recommend a dividend per share of 2.78 pence, and expects to maintain this figure for the next two financial years.
In the update, BP Marsh said its strong performance is expected to continue throughout the current financial year.
Jefferies believes the firm holds a "deep discount".
"It appears to us that the share price presumes future returns will be lower than the historical average, while simultaneously applying a high illiquidity premium.
"Given the industry-wide factors and the recent run of disposals, we believe that the current discount to NAV is unwarranted. Even when presuming a 12% cost of equity - which offers 200bps risk premium for illiquidity - and a 10% return on equity - which is in line with the long-term average - we value the group at 0.88x price-to-book ratio, implying over 30% total return upside."
This upside, Jefferies stressed, was backed up by a RoE in the period from 2008 to 2011 of 12.9%, rising to 14.3% during 2015 to 2020, driven by a strong 15.1% average return prior to the pandemic and a "resilient" 9.9% return even during the pandemic.
By Paul McGowan; [email protected]
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