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Gresham House (GHE:315p), a specialist asset manager and another constituent of my 2016 Bargain Shares Portfolio, has been in the news, too. I analysed the first-half trading performance in an online article (‘Bargain Shares: small-cap updates’, 3 Oct 2016), since when the company has announced the early receipt of £940,000 of deferred proceeds from the sale of its Newton-le-Willows site after the acquirer, Persimmon, sold properties more quickly than anticipated. The company has also announced that it issued 909,908 warrants at 28p each and with an exercise price of 323p to investment company LMS Capital (LMS:57p). Subsidiary Gresham House Asset Management (GHAM) was appointed as external investment manager to LMS in the summer and at the time LMS became a strategic investor in Gresham House through the issue of 332,484 initial consideration shares. Since then, LMS has made market purchases of 469,501 shares to give it a holding of 7.8 per cent. If all the warrants are exercised by their expiry in June 2018 then this will take LMS’s stake in Gresham House to 15.4 per cent.
Furthermore, Gresham House has rock-solid asset backing including property assets worth £9.9m; deferred consideration from Persimmon of £5m on the aforementioned land sale, of which £1.14m is due in March; a holding in GHS shares worth £6m; and the £4.3m initial investment in forestry asset manager Aitchesse. Net debt of £1.9m at the end of June equated to 8 per cent of shareholders’ funds. Or, to put it another way, strip out property and legacy assets from Gresham House’s market value of £32m and its fund management business, which now has assets under management of £374m, is being valued on less than three times annual management fee income. That’s a harsh valuation for a company that could move into profit next year on the back of lucrative mandate wins. Indeed, its new forestry fund attracted £15m of capital at first close this week, and the aim is to increase the fund size to £50m by final close in the second half of 2017.
The shares are modestly up on my buy-in price in this year’s portfolio and fair value around 400p is not unreasonable. Buy.