CRYSTAL AMBER FUND LIMITED
(“Crystal Amber Fund” or the “Fund”)
Monthly Net Asset Value
Crystal Amber Fund announces that its unaudited net asset value (“NAV”) per share at 30 September 2016 was 202.02p (31 August 2016: 189.96p per share).
The proportion of the Fund’s NAV at 30 September 2016 represented by the ten largest holdings, other investments and cash (including accruals), was as follows:
|Top ten holdings||Pence per share||Percentage of investee equity held|
|Hurricane Energy Plc||58.7||15.3%|
|Pinewood Group Plc||18.6||5.7%|
|Leaf Clean Energy Co.||14.4||29.9%|
|STV Group Plc||13.9||9.2%|
|Sutton Harbour Holdings Plc||8.3||29.3%|
|FairFX Group Plc||7.3||24.9%|
|Hansard Global Plc||5.0||3.3%|
|Shepherd Neame Ltd||2.6||1.3%|
|Total of ten largest holdings||187.1|
|Cash and accruals||0.5|
Investment Adviser’s commentary on the portfolio
Over the quarter to 30 September 2016, NAV per share increased by 31.4 per cent. This was after the payment of an interim dividend of 2.5p. Adjusting for this, total returns in the quarter were 33.0 per cent.
The top three positive contributors to NAV growth over the quarter to 30 September 2016 were Hurricane Energy plc (21.7 per cent), Northgate plc (3.6 per cent) and Grainger plc (1.7 per cent). The main detractor was FairFX Group (-0.3 per cent).
Hurricane Energy plc (“Hurricane”)
On 6 July 2016, Hurricane announced the spudding of its new exploration well in the Lancaster field. On 9 September 2016, Hurricane announced positive drill results from its Lancaster well, guiding towards contingent resources significantly higher than previous estimates of 200 million barrels, high flow rates (6,600 barrels of oil per day) and good quality oil. The Fund believes that these results materially de-risk the assets for further development.
The Lancaster 7 drilling campaign was funded by a placing of new shares in April 2016 led by Kerogen Capital and Crystal Amber. In recognition of its strategic input, the Fund was awarded warrants over 23.3 million shares at 20p.
Over the quarter to 30 September 2016, the share price increased by 131 per cent to 39.25p.
Grainger plc (“Grainger”)
Grainger was established in 1912 and is the UK’s largest listed residential property owner and manager. Its traditional reversionary business is based predominantly on regulated tenancies, which provide substantial and predictable cash flows. Its portfolio of 3,710 reversionary assets has a market value of £1.3 billion. As these properties become vacant, Grainger estimates that they will generate a surplus of £332 million. This surplus is not capitalised and we regard these gains as ‘off balance sheet assets’ providing probable future economic benefits. This reversionary surplus is the difference between today’s market value as a lower yielding tenanted property compared to the vacant possession value at today’s prices. It does not reflect any future benefit from house price inflation.
We have long believed that annual administrative expenses of £36 million are excessive. This equates to an administrative expense ratio of 3 per cent on £1.2 billion of net assets, which is substantially higher than its peer group. In May 2016, Grainger announced that an operational review had identified a minimum of £8.6 million in overhead cost savings relative to September 2015, representing a reduction of 24 per cent, which will reduce the 2017 overhead cost to £27.5 million. Whilst the Fund welcomes this improved efficiency, we have identified far greater savings and efficiencies.
The Fund continues to engage with the management of Grainger. As well as addressing the opportunity to lower the operating and financial costs of the company, the Fund is in active dialogue with management regarding optimising structures. We note that in July 2016, the company converted its PRS Fund, GRIP, into a Real Estate Investment Trust and commented on the suitability of this structure for PRS investment. Grainger’s share price continues to trade on a discount to net asset value of more than 20 per cent. Despite our discussions, we note management’s continued refusal to implement a share buy-back programme which would secure an immediate risk free return of 28 per cent and increase net asset value per share. As a result, the Fund is now seeking alternative solutions to release value within Grainger.
Northgate plc (“Northgate”)
On 4 July 2016, Crystal Amber disclosed that it had acquired three per cent of the issued share capital of Northgate. The Fund announced it had written to the company setting out its assessment of the company’s prospects with suggested actions, which included a strategic review to consider a potential sale of all or part of the business.
During the quarter, Northgate’s share price increased by 32.4per cent, recovering from its post Brexit decline. The Fund maintains the view that there is a significant opportunity to better capitalise on the Northgate brand and market positioning. During the quarter, the Fund increased its position in Northgate to 4.3 per cent of Northgate’s share capital.
Pinewood Group plc (“Pinewood”)
During the quarter, Pinewood received a formal takeover offer worth £320 million (563.2p per share). The offer was made by Aermont Capital, a subsidiary of PW Real Estate Fund, reinforcing Crystal Amber’s view that Pinewood’s real estate portfolio was undervalued. At 30 September 2016, the Fund held 3.2 million Pinewood shares equal to 5.7 per cent of Pinewood’s issued share capital. Since investing in April 2015, the Fund’s total gains have been £6.1 million, equivalent to a return of 43 per cent. on the investment cost. The proceeds receivable from the offer are anticipated to be received on 18 October 2016.
Restaurant Group plc (“Restaurant Group”)
The Fund increased its position in Restaurant Group following the Brexit sell-off, which saw an immediate share price mark down of more than 20%.
In August 2016, the company announced the departure of the CEO with immediate effect and the appointment of Andy McCue, former CEO of Paddy Power. Following a 50% increase in the share price from post-Brexit lows, the Fund took profits and sold its position in the company, realising a gain of £1.3 million.
Transactions in Own Shares
Over the period, the Fund bought back 160,000 of its own shares at an average price of 157.7p per share as part of its buyback programme. These shares are held in Treasury.