Work back through the regulatory filings for Charles Taylor (LON:CTR), supplier of professional services to the insurance industry, and you’ll come across April’s announcement confirming the successful conclusion of a £30.6mln rights issue.
The document is interesting on a couple of levels.
First, it revealed strong support for the stock offering – though the generous discounting of the shares probably helped in this regard.
And then, when the dust settled, we learned two new investors had been added to the shareholder register that aren’t natural foragers in this part of the market: JP Morgan and Soros Fund Management.
The second-largest holder of CT stock is Miton, led by the small-cap guru Gervais Williams, who is on record as a big fan; in fact the stock is a key part of the Miton Managed Diverse Income Trust.
"Support was fantastic both from existing and new institutional investors,” chief executive David Marock told Proactive Investors. “We couldn’t have better support.”
So, just what has excited the interest of Williams’s Miton, Soros, JP Morgan et al?
Three words: income and growth. But before I get onto the investment thesis, it may be worth looking under the bonnet.
The business employs 1,200 people in almost 30 different countries and has four distinct areas of activity.
It is a long-term business partner to insurance businesses, organising and operating all aspects from marketing to underwriting to claims management.
When I say long-term, one of these relationships spans more than a century, while others have run for more than three decades.
This provides a very stable recurring revenue base, as does its loss adjusting service. For dealing with the large, complex and long-running insurance cases in the airline, energy and shipping sectors cases can sometimes take several years to conclude.
It is a top three firm in the areas of loss-adjusting in which it specialises. This means clients tend to call on its expertise over and over again.
CT also offers a range of insurance-related business services such as investment management and insurance technology, with the latter proving to be a handy growth generator, according to Marock.
And it recently won approval to establish a managing agent and was appointed by a new syndicate on the Lloyd’s insurance market, which ought to be value accretive.
Alongside this, the firm has been active in acquiring offshore life assurance companies.
In fact, its track record to date has been very good with the payback on CT’s initial investment usually occurring in 12-18 months.
And this brings us back to the rights issue. While it had enough in the tank to fund and grow the existing business, CT thought it prudent to have cash on tap in to make further acquisitions.
“We did it to give is a war chest for when opportunities came up,” said CEO Marock.
“Each opportunity on its own didn’t justify a rights issue. Now we have funds to do small and mid-sized deals on an opportunistic basis.”
Those who bought into the stock at the rights issue price of 155p are already sitting on a very tidy profit today with the shares changing hands for 260p each.
They have a stake in a strong, stable business with relationships across both the global specialist insurance markets and the marine and energy sectors. As Marock points out: “We have a strong core.”
While it is working in niche areas, Marock points out these are “large niches”, if that’s not a contradiction. And it is diversified enough that if one part CT isn’t performing, investment can be diverted to parts of the operation that offer better returns.
Newly created products and services along with new businesses will drive top and bottom line growth, while the acquisitions will undoubtedly help.
The recent interims reveal adjusted profits grew by 14%, while CT pays a very decent dividend giving a yield of around 3.6%.
At 260p, the stock is trading on less than 12 times forward earnings. The City brokers would describe the valuation as “undemanding” – that is City speak for cheap.
So there may be scope for a “re-rating”. Translation: an increase in that undemanding valuation.
Marock said: “We provide stability that income investors are looking for and there is quite substantial growth potential.”