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I had an informative results call with Tony Dalwood, chief executive of specialist asset manager Gresham House (GHE:410p), shares in which I suggested buying at 400p ahead of the announcement (‘Investment company watch’, 12 February 2018).
The key points to note are that the business turned profitable in the second half of 2017, driven by a £286m increase in assets under management (AUM) to £649m, of which £200m was organic growth and the balance from the recent acquisition of Hazel Capital, a leading UK manager of new energy infrastructure and two renewable energy VCTs. This meant that annualised management fee income run rate was £7.7m at the 2017 year-end, suggesting that Liberum Capital’s 2018 target of £8.55m of fee income could prove on the light side. That’s because the final close of the Gresham House Forestry Fund could add £30m to AUM this month, a €5m fundraising for one of the Hazel VCTs launches this week, and British Strategic Investment Fund (BSIF), a closed-ended Guernsey Limited Partnership, which invests in relatively illiquid investments in UK housing and infrastructure-related assets, could add £85m of AUM at final close later this year.
Given the operational gearing effect on profits of rising management fee income, I feel Liberum’s pre-tax profit estimate of £793,000 for 2018 is conservative, especially as the directors are looking to add further scale to the business by using its pro-forma cash pile of £12m to make acquisitions. Liberum’s predictions that pre-tax profits will more than double to £1.65m on fee income of £10m in 2019 are achievable, and look on the low side, too. My sum-of-the-parts valuation of 460p a share, which takes into account deferred payments on previous property disposals, net cash and listed shareholdings, could prove conservative. Buy.