Investors are increasingly using environmental, social and governance (ESG) criteria to evaluate companies in which they invest. Government policy in many countries is leading the way by supporting a scaling up of environmentally friendly energy generation and vehicle usage, and prioritising our social responsibilities such as delivering more affordable housing.
Gresham House (GHE:925p), a fund manager specialising in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, was well ahead of the game when I first highlighted its potential in my 2016 Bargain Shares Portfolio. The group now manages solar and wind projects that generate enough electricity to power 131,000 homes, manages 140,000 hectares of forestry that captures the equivalent CO2 generated by 266,000 people in the UK, and its funds are investing in 733 shared ownership homes this year alone.
The fact that Gresham House’s share price has trebled in the past five years not only reflects the increasing importance of ESG investing, but also the healthy investment returns the fund manager has produced that is driving strong organic growth. A series of shrewd acquisitions adds to the appeal, the latest of which was announced alongside eye-catching first half results.
Gresham House delivers major earnings upgrades
- 19 per cent increase in assets under management (AUM) to £4.7bn in first half of 2021 includes 12 per cent organic growth.
- First half adjusted operating profit surges a third to £6.9m.
- Four funds raise £350m since half-year end.
- Oversubscribed placing of £42m, at 910p, a share to fund earnings accretive acquisition of Mobeus Equity Partners.
Gresham House’s complementary acquisition of Mobeus, a UK-investment firm with four VCTs and AUM of £389m makes sound strategic sense, bringing together two of the leading teams and brands to create a VCT platform with £850m of AUM. Mobeus’ focus on private markets and emphasis on total return is highly complementary to the group’s existing Baronsmead VCTs, which invest in unlisted and public companies to deliver consistent dividends.
Gresham House chief executive Tony Dalwood points out that Baronsmead’s AUM has surged 44 per cent since the group acquired the business, and there is scope to replicate the success with Mobeus’ VCTs by enhancing its distribution network, building the brand and investor relations. The total consideration of £36.1m (includes £9.1m deferred and £3m subject to earn-outs) equates to eight times Mobeus’ operating profit of £4.5m, a fair price.
As highlighted in this summer’s pre-close trading update, Gresham House delivered a 19 per cent increase in AUM to £4.7bn in the first half (‘Bargain shares: Building momentum’, 26 July 2021). Since then the group has raised a further £350m for funds including £100m for its British Strategic Investment Fund and the same for a forestry fund, both of which could have further follow-on closes in the fourth quarter, says Dalwood. Gresham House has also been appointed asset manager for a 24,800-hectare Australian forestry investment, Green Triangle Forest Products, which AXA Investment Management is acquiring on behalf of clients. The mandate is worth £400m and the transaction is expected to close by the year-end.
Sensibly, Gresham House continues to deploy its balance sheet strength – cash and liquid resources of £45m pre-placing – by investing in utility scale battery projects to support growth of Gresham House Energy Storage Fund (GRID), the largest listed specialist fund in UK energy storage systems, which has launched and closed a fundraise of £100m in the current quarter. Gresham House has £11m invested in such projects. Gains made on these investments supplements recurring management fee income earned.
The group is trading well ahead of analysts’ previous forecasts, prompting Panmure Gordon to upgrade earnings per share (EPS) estimates materially to 35.1p in 2021 (10 per cent upgrade); 46.3p in 2022 (9 per cent upgrade); and 51.1p in 2023 (8 per cent upgrade). Moreover, these forecasts exclude any profit contribution from the additional capital raised in this week’s oversubscribed placing. On this basis, the shares are trading on a forward cash-adjusted PE ratio of 15 for 2023, a modest rating for a group set to deliver 45 per cent EPS growth over the next two financial years. I raise my target price from 1,000p to 1,100p. Buy.
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