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I also feel that it’s worth buying shares in specialist asset manager Gresham House (GHE:400p) ahead of full-year results on Thursday, 1 March. I included the shares in my 2016 Bargain Shares Portfolio, and last rated them a buy at 335p at the time of the interim results last autumn (‘Inflexion points’, 20 September 2017).
Since my last update, Gresham House has completed the £2.6m acquisition of the asset management business of Hazel Capital, a leading UK manager of new energy infrastructure, and has become investment adviser to two renewable energy VCTs managed by that company. Hazel Capital also manages several battery storage projects and has successfully commissioned one of the UK’s largest battery storage facilities near Bristol. Gresham House has invested £2m to take stakes in three of these projects too. The acquisition of Hazel Capital adds a portfolio of operating assets which, alongside the VCTs, forms a new division with £100m of assets under management (AUM). It also means that Gresham House has AUM of at least £630m, up from £242m only two years ago.
Part of the increase reflects last summer’s first close of the British Strategic Investment Fund (BSIF), a closed-ended Guernsey Limited Partnership with a 12-year life, which raised £150m of capital from pension funds, endowments and family offices. The fund is focused on generating an annualised net total return of between 8 and 10 per cent from relatively illiquid investments in UK housing and infrastructure-related assets that have low correlation to traditional asset classes and a positive link to inflation. A final close is planned for the second half of this year and is supportive of further growth in Gresham House’s fee income.
So too are Gresham House’s forestry funds, which increased AUM by 5 per cent to £258m in the first half of 2017, and will benefit from the final close of the Gresham House Forestry Fund. This fund is targeting net returns of 10 per cent a year, and an annual distribution of between 2 per cent and 4 per cent from timber sales.
As a result of the boost to fee income, analyst Justin Bates at brokerage Liberum Capital believes that Gresham House will hit run rate profitability in the second half of 2017, earlier than anticipated. Mr Bates predicts the company will report a small underlying pre-tax loss of £784,000 based on fee income of £5.6m in 2017, and is pencilling in pre-tax profits of £793,000 on fee income of £8.55m this year. Given the operational gearing of the business, expect profits to ratchet up quickly thereafter, which is why Liberum predicts pre-tax profits will more than double to £1.65m on fee income of £10m in 2019.
Importantly, Gresham House has ample cash to support further investment in scaling up its funds, having recently announced the £2.1m disposal of its remaining legacy asset, a five-acre site to Countryside Properties. This should lift net funds to around £14.6m, representing half the company’s net asset value of £30m. Gresham House also owns a shareholding worth £6.5m in investment company Gresham House Strategic (GHS:840p), another constituent of my 2016 Bargain Shares Portfolio and one in which Gresham House’s asset management arm has the investment mandate. There is upside to that holding given that Gresham House Strategic’s shares are priced on a harsh 27 per cent discount to NAV of 1,145p a share, and it holds a number of investments in companies I am positive on including: Aim-traded technology company IMImobile (IMO:250p), a business that helps companies engage with their customers across all mobile devices by offering smart software products based on proprietary technology; asset manager Miton (MGR:41.5p); and challenger bank PCF (PCF:27p), a constituent of my 2018 Bargain Shares Portfolio.
Needless to say I continue to rate shares in Gresham House and Gresham House Strategic in a positive light, and have respective target prices of 460p (based on a sum-of-the-parts valuation) and 1,000p (based on a 13 per cent share price discount to spot NAV). Buy.