B.P. Marsh & Partners PLC (BPM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the B.P. Marsh & Partners PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today, and publish responses, where it's appropriate to do so, and these will be available via your Investor Meet Company dashboard. Before we begin, if I may, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand over to Chief Investment Officer, Dan Topping. Good morning, sir.

Good morning. Good morning, everyone. Thanks for joining us. We're looking forward to presenting on our results, and I think we'll move straight into the presentation and put it up on screen if we can. I'm pleased to welcome you all, as I said, to our Full Year Results at 31st January 2023. It will be myself, Dan Topping, the Chief Investment Officer; and Jon Newman, our CFO, presenting on these results. We're very pleased with these results, and I'd like to take this opportunity to thank all the members of the B.P. Marsh team and the wider portfolio for their efforts in allowing us to achieve them. The key takeaways for our results on Slide 3. Consolidated profit before tax of GBP 27.6 million, GBP 8.2 million up from prior year or 42% increase. Net asset value is of [ GBP 189.5 million ], GBP 22.9 million increase from prior year. And regarding portfolio, 19.1% increase in the value of equity portfolio year-on-year, providing a total shareholder return for the period -- for the year of 14.4%. Presently, we've got available capital of GBP 5.2 million for investments. As I said, we're delighted with the overall performance of the group there, which is a continuation of our solid year-on-year growth recently during an extended period of wider instability. Given the significant post-year-end events and all these results, I thought it made sense to change up our usual order of presentation and focus on the sale of Kentro and the proposed use of the proceeds, Slide 6 and 8. When talking about Kentro, it's hard to avoid the conclusion of this investment and poses a prime example of our unique investment approach and our ability to produce bespoke investment opportunities which provide the opportunity for significant returns. As is noted, we initially acquired 5% stake in Nexus for GBP 1.5 million, which we then -- currently Kentro, was previously called Nexus Underwriting Management, a profitable underwriting agency specializing in financial lines and trade credit insurance. Since then, Nexus, now Kentro, leveraging B.P. Marsh's experience and skill sets, completed circa 20 acquisitions and grown its revenue and profitability by approximately 10x with adjusted EBITDA growing from circa GBP 2 million to north of GBP 20 million. We will end our partnership with the management team at Kentro as the largest single shareholder in the business, having provided aggregate funding of GBP 15 million in equity. And this will provide -- upon regulatory approval our consideration will be GBP 51.5 million, representing a 25% IRR over a 9-year investment period. Before moving on to how we intend to utilize these proceeds, I thought it made sense to provide an overview of the recent portfolio disposals we've made, which is Slide 7. As you all know, since 2017, we made 6 realizations, delivering equity proceeds to B.P. Marsh's of over GBP 93 million on equity investments of just under GBP 27 million, so approximately 3.5x money multiple. I think all tangible examples of the success of our investment approach. And our presentations in the past are not uncommon line of questioning was over valuation and the ability to realize portfolio investments at our valuation. I hope this slide goes some, if not all the way, in addressing these 3 points. Turning to Slide 8, what we intend to do with Kentro proceeds. As recently announced, we intend to return circa GBP 13 million of the proceeds from the sale, which is close to 25% via dividend and share buyback policy, which will commence upon the receipt of the proceeds. We believe this rewards our shareholders for their patience and support to the company whilst also providing significant firepower for the new investments and to support the existing portfolio. In terms of business strategy, Slide 9. This remains unchanged, and we have an exciting pipeline of new investment opportunities, which delving slightly on Slide 10, which will have the opportunity to execute, subject to us being able to obtain satisfactory terms of investments. And point of fact, the most pressing opportunities under discussion investigation were all prior to the announcement of the disposal of Kentro whilst we expect an increase in new business proposals on the back of this disposal. It's our intention to maintain a measured approach to new business without the feeling of the money burning a hole in our pocket. As mentioned during previous presentations, consolidation at the bigger end of the market continues to drive significant new business opportunities which I expect to continue into the future. Turning to new business/the ongoing portfolio as detailed on Slide 11. We completed a modest investment in Verve Risk Services, a London-based specialist underwriting agency, an area where we have good experience of and success in, and we look forward to working with the management team over the next few years to grow the business. Activity within the portfolio continued the pace, and we provided follow-on funding by way of loans as follows: Slide 12, GBP 4.9 million to XPT. As you all know, with the proposed disposal of Kentro, XPT will become our single largest investment, which is no mean feat, given we invested in 2017 as a startup, and it now produces over $700 million gross written premium across 19 offices with over 250 employees and adjusted EBITDA for 2023 potentially exceeding GBP 20 million. The value of our holding in this company has increased year-on-year by just under [ GBP 13 million ] or 59.5% to GBP 34 million. Turning to Slide 13. We provided GBP 0.5 million of a GBP 2 million facility to CBC. CBC continues to deliver excellent growth as a portfolio company by both organic and new hires. This plan was provided to allow CBC to fund the capital for a new underwriting agency start-up, Alchemy Underwriting, which had an exceptional start to life. This benefits CBC directly by the value of its shareholding owned approximately 22.5% of the business and also the fees it received from the provision of outsourced services and placing commission on Alchemy's Underwriting facility. The value of our holding in this company has increased year-on-year by just under GBP 10 million or 104% to GBP 19 million. The full insurance portfolio is set out on Slides 14 and 15. Other notable performers being ATC, Slide 16, and Lilley Plummer Risks, Slide 17, both delivering significant year-on-year growth with exceptional prospects looking to the future. In looking at the wider insurance portfolio, pleased to state 2 facts. The majority of the value growth achieved for the 2023 financial year was predominantly delivered by the broking investments, which on to turnaround to recent results announcements whereby the underwriting portfolio has been the standout. I think we flagged our expectation with regards to this eventuality regarding the slightly longer gestation period for brokers as well as the underwriting agencies generally speaking. The second factor is that the 2022 financial year. There was negligible value uplift relating to Kentro because we knew we were going to be in the process of selling it, and we knew where our realization value would be. And therefore, the growth year-on-year within the NAV has been delivered by the portfolio excluding Kentro, which shows where we see the potential going forward. Things worth noting that we wrote off 2 investments during the EC3 Brokers and Asia reinsurance brokers. EC3 ultimately being faced with voluntary liquidation. COVID-19 certainly playing a major part in this unfortunate situation. But sort of B.P. Marsh's differential/silver lining promises that working with other portfolio companies, we were able to find employment for both front and back office staff of EC3 with a team of brokers join, they become a risk with an immediate positive effect. Whilst we are sometimes faced with tough financial choices, we try not to ignore or avoid the human impact of these situations and try as best as we can to remediate wherever we can. On Asia Reinsurance Brokers, while we've written [indiscernible] it does continue to trade. But as ever, we believe the conservative approach is to maintain our write-down, while the business tries to reposition itself. Turning to the aggregate insurance position, Slide 18. We must say the aggregate size of the premium within the portfolio, and it's often suggested by the wider market, not by us. But B.P. Marsh walks off, but carries a big stick. And I think this is what they're meaning when they reference that. And hopefully, we set this out in the slide. On the subject of the wider market, we've included Slide 20, which sets out our very high level overview on where pricing sits on a premium basis. Property premium growth shows no signs of abatement. Whilst broadly speaking, this is a stellar set of results for the company, it hasn't all been an unbridled success. We've had to make a significant write-down against our noninsurance investment, financial planner LEBC. This is detailed on Slide 21. We wrote this investment down by approaching GBP 10 million. The investment dates back to 2007, so by some margin, our longest investment predating the majority of the team at B.P. Marsh & Partners as I joined. To an extent, it's tough with the slings and arrows of outrageous misfortune. It's certainly a challenging area of financial services. We've gone through various rounds of management change with some strong performance along the way. Unfortunately, due to a variety of reasons, the strong performance has, in some cases, unwound. And we're also faced with a difficult position following the untimely death of the CEO, Jack McVitie. Notwithstanding the above, I feel optimistic as regards to this investment and its management team, led by Derek Miles. He continues to perform an excellent job in what has been challenging circumstances. It does -- as a business as usual, it is profitable. I think we've worked with LEBC to mitigate some of the challenges they face. Turning to Slide 22. In drawing my presentation to a close, as I said at the beginning, we're actually delighted with the results achieved. Thanks to our partnership with our portfolio companies. The end of our successful partnership with Kentro has drawn to a close. But as demonstrated by the numbers, the ongoing portfolio has the ability to produce further significant growth. From a financial reporting standpoint, this is going to be our most profitable year ever. From a PBT and a growth standpoint and post year-end, we delivered our biggest ever realization, leading to our largest ever return of capital to shareholders. The cash position is strong. We have a strong pipeline of new business opportunities. So in a very optimistic position. We believe Kentro will prove to be a transformational realization for the company, which supercharges as we look into the future without the requirement, need or desire to change our modus operandi. As a team, we're very much excited by the future and certainly, as Chief Investment Officer, I share this sight or the sense of excitement and opportunity. Since becoming a director in 2011, I've observed or participated in significant changes within the group, which have fundamentally positive outcomes on the company and ultimately, the share price and shareholder returns, which, in the long run, is the scorecard for us as a listed business. Looking to the coming years and decade ahead, I see the same potential, if not greater. Before handing on to Jon, I'm hopefully repeating myself for the final time, all of this could not be achieved without the team of B.P. Marsh and our portfolio partners within -- our partners within the portfolio. Jon particularly [indiscernible] got good experience and good skill set; Brian Marsh, who is the Chairman; and [ Patrick McNamara ] is a recent joiner. I think we're all delighted with the results we achieved and invigorated to repeat in the next coming years. I will now hand over to Jon to talk to more detail his thoughts on the financial KPIs within our results, and after which, we can close out the presentation with any questions anyone may have.

Thank you, Dan. So I'm pleased to present the key financial highlights for the year to 31st of January 2023. So overall, NAV increased by GBP 22.9 million or 13.8% for the year and now stands at GBP 189.5 million. That's equivalent to 526.2p per share or 516.8p on a diluted basis, and that's in relation to shares that the management team have within a JSOP arrangement. So this equates to a total shareholder return of 14.4% for the year, including GBP 1 million of dividend that was paid in July of '22. Overall, the group delivered consolidated profit before tax of GBP 27.6 million for the year, up GBP 8.2 million or 42% over the prior year. The majority of their profit relates to the increase in valuations of the investments that Dan has covered, with the equity portfolio rising by 19.1% adjusting for additions and realizations to GBP 171.5 million. Circa 3% of the return in the year related to foreign exchange gains on the investment portfolio due to the current weakening for the segmental reporting section of our accounts, which may say this is based upon where our investments have domiciled, 37% of our equity investment portfolio by value is overseas versus 63% in the U.K. However, on a look-through basis, based on where the revenues actually originate from, this is actually the opposite. Approximately 63% of the portfolio is overseas. One of our core strategies is to seek to ensure that the yield from our portfolio covers our operating expenses so that our investment cash doesn't get depleted by working capital. On an underlying basis, this was achieved with the PBT GBP 0.3 million for the year. Last year, it was GBP 3.2 million, but that included GBP 2.9 million of realized gains on disposal mainly from the sale of Walsingham. So otherwise, year-on-year, it's comparable. Final dividend of 1.39p per share or GBP 0.5 million is being proposed to be paid in July '23, bringing the total distribution for the year to 2.78p per share or GBP 1 million, including the GBP 0.5 million that was paid in February '23. That was in line with the prior year. So on to Slide 24. Since floatation, the group has achieved compound growth of 8.7% and 11.7% since inception. That's after all expenses, tax and distributions and excluding any capital raise. So this slide sets out the key investment realizations and loan portfolio movements during the year. We've invested GBP 2.9 million in equity, GBP 2.8 million in follow-on funding into XPT in the U.S. and GBP 0.1 million into a new startup investment of Denison and Partners. We also received GBP 8.2 million in proceeds from realizations during the year, some of which we announced at the end of the previous year completed in March, delivering net equity proceeds of GBP 8.1 million, and we also received additional GBP 0.1 million in funds from the sale of MB that actually occurred in '21. Turning to the loan book. This stood at GBP 11.5 million at year-end compared with GBP 10.4 million at January '22. We granted GBP 2.7 million in new loans during the year, GBP 1.5 million is for LEBC for an acquisition, GBP 0.7 million to Ag Guard for working capital and GBP 0.5 million to our new investment, Denison and Partners. GBP 1.7 million of loans were repaid during the year. The majority of this GBP 1.5 million was from Summa on completion. Given that we don't set exit clauses in a medium to long-term investor with an average holding period of over 7 years currently, we often structure our investments as a mixture of debt and equity, not just debt. And this enables a yield to be received on the investment to cover our operating costs, and the debt repayments helped to replenish capital funds rather than having those funds tied up and to move at an eventual exit. There is a slide in the appendices on Slide 30. This sets out the loan book in full and all are valued at par. The average interest rate charged for the year was 8.6%. That was up from 6.9% in the previous year and reflects the increase in base rates that has occurred over the period. At the year-end, we had GBP 12.1 million in cash, up from GBP 8.6 million at the previous year-end with the increase due to the similar realization less the net loans granted new investments and GBP 1 million of dividend that was paid. So based on the current share price of 370p per share, this means that we're at a current discount to diluted NAV of 28.4%. So following slide, there have been a number of significant developments since the year-end. In January, we announced GBP 1 million share buyback policy. And to date, we bought back over 103,000 shares for circa [ GBP 330,000 ] at an average price of 319p per share. On the current diluted value of 516.8p per share, we would value those at [ GBP 533,000 ], so we are 62% up on that. In May, we announced the agreed sale of Kentro subject to regulatory approval. We should provide GBP 51.5 million in cash net of transaction costs. We've also provided since the year-end, GBP 4.6 million in net new loans, of which GBP 4.9 million went to XPT to enable further acquisitions, of which $0.8 million has subsequently been repaid, As I mentioned, GBP 0.5 million to CBC as part of a new GBP 2 million facility to fund the new start-up London Property MGA. We also announced we have invested GBP 1 million in a new investment, Verve, in a mixture of equity and debt. Current cash is GBP 5.2 million, which is expected to increase to over GBP 56 million on completion of Kentro. As Dan has set out, the proposal is then to distribute 25% of the proceeds, GBP 7 million by dividends over 3 years and a new GBP 6 million share buyback policy. So turning to Slide 26. To summarize the position, why invest in B.P. Marsh? We're a leading specialist investor with an excellent track record and team with a wealth of experience. Although we specialize in financial service businesses with a specific interest in insurance intermediaries, our portfolio is diversified in terms of product lines and geographically mitigated risk. We've achieved 8.7% compound growth since floatation, 11.7% since inception after all expenses, realizations, distributions, and that's through identifying excellent growth opportunities and delivering added value and return to shareholders as demonstrated by growing the NAV to GBP 189.5 million. When Kentro completes, we expect to have over GBP 56 million cash pre-distributions. We've demonstrated that we can successfully realize investments at or above prior valuations with strong exit performance over the last 18 months with cash sales of Walsingham, Summa and now Kentro. This has provided the opportunity to return 25% of the expected Kentro proceeds, rewarding shareholder loyalty whilst providing significant cash to fund both new and existing opportunities. We consider the current discount to diluted NAV of 28.4% to be unwarranted. So this concludes our formal presentation. I will hand back over to IMC to invite any questions that you might have.

That's great. Dan, Jon, thank you very much indeed for your presentation this morning. [Operator Instructions] But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a couple of the slides and the published Q&A, can be accessed via your investor dashboard. Jon, Dan, as you can see, we have received a number of questions throughout your presentation this morning. Thank you to all of those on the call for taking the time to submit their questions. Simon, if I may hand over to you to chair the Q&A session with the team, and then I'll pick up from you at the end. Thank you.

Thanks, Jake. Let's start with a presubmitted question. There's always been a substantial discount to NAV. Is the buyback program going to make an appreciable difference? And what are other measures have been considered to reduce the discount to NAV?

Well, there has been a significant discount to NAV to share price. I think certainly, the buyback is tend to go some way to address that. Time will tell. If it does make an appreciable difference, we certainly think it hopefully should. In terms of what we've considered, we've got a sort of parallel smaller share buyback where we've used that to try and manage the discount as best we can. But everything is under consideration to manage the discount from dividends, which we've increased. And clearly, with realizations, we seek to continue meaningful distribution of sale proceeds. I think with the Kentro realization, we're going to return 25% to shareholders. Whilst we're not going to impose any rules on disposal, I think that's a fairly decent starting point to have a 25% return to shareholders. That is the best way possible for the shareholders and that should hopefully have an impact on the discount to share price and NAV -- NAV to share price. I think there will always be a natural discount, but it's our job to try and make that natural discount as small as possible.

I'd add to that. Delivering on results, we've taken a sort of almost 20% increase in the share price over the last months since we announced the Kentro disposal and delivering that and it's -- yes, continuing to prove what we always set out.

Thanks, guys. Assuming that that's the idea a little bit further question from [ Alex ]. Can we expect to see further realizations following the same path as the Kentro sale? And Dan, I think you've already partially answered that one in returning cash to shareholders. And do you see this strategy as a catalyst to attract new investors?

Yes. I think whilst not setting a hard and fast rule, certainly that's what we think makes sense in terms of distribution to shareholders, what we've done with Kentro. And certainly, I would take it as a catalyst to attracting investors giving them the opportunity to invest in a very strong portfolio that delivers outsized results.

Okay. A couple of questions on new opportunities and new investments. In terms of balancing new investments and cash returns, do you have a defined metric of how you divide those 2? And could you identify a little bit further and expand on the pipeline of new investments that you've got? And how specifically do you identify new opportunities?

On the metric, no, we're more flexible than that. But I think regardless of the cash position, we're not going to change our investment approach in terms of the target deals that we're looking at. We do have a good inflow of deals in our daily work in that sort of 0 to GBP 5 million investment gap that we detail in the appendix on the presentation, and that's certainly not slowing down. I think -- what we do like to do is follow our money. We've got, generally speaking, a very successful track record of that. So whilst not changing our new business approach within the portfolio, we've got significant areas where we can deploy that capital. And using Kentro as an example for an exit investment, we started with GBP 1.5 million committed, and we've gone to GBP 15 million, which is our biggest, and then looking within the portfolio, XPT isn't far behind and has achieved a great deal. So we will continue to deploy investments into XPT, I would imagine, should the right proposals come through, which I suspect they will. And then the other part of the question. The new opportunities, I think we don't participate in options like our mid-market private equity do. Reputationally, we feel we developed a very good reputation within our area of operation, and we continue to see people coming to us as the capital provider of choice in insurance distribution businesses and certainly that's evidenced by our results from a quantitative standpoint. We are, I'd say, unique in funding flexibility and provision of funding such that people come to us on reputation, and we are the only game in town.

Thanks, Dan. Thanks, Jon. There are no more questions, and I'll hand back to Jake.

Thanks, Simon and Dan and Jon as well. Thank you very much indeed for being so generous of your time addressing in those questions that came in from investors this morning. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. I'd just need to review there are not any additional responses, of course, where it's appropriate to do so and we'll publish all those responses out on the Investor Meet Company platform. But Dan, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Thank you very much, and thanks to everyone who's attended this call. We really welcome people learning more about the business. We like to tell the story. We think it's an exceptional story of what we've achieved and the opportunity for what we can achieve going forward. I think this set of results demonstrates that we certainly feel very confident and comfortable of what we can and will achieve going forward next 6 months, next 12 months, next few years to expand on the performance of the portfolio. So thanks for people attending and just to thank everybody at B.P. Marsh for all they've done and what we've achieved and continue to achieve. And if there are any -- if people do have any questions after the fact, please formally send at Investor Meet, we will address every question raised either during the meeting or if it's raised after the meeting. So please if anything pops into your head, do get in contact.

Dan, that's great. And Jon as well, thank you, once again, for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of B.P. Marsh & Partners PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.