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 31 March 2019 was 219.37 pence (28 February 2019: 204.71 pence per share).
The proportion of the Fund’s NAV at 31 March 2019 represented by the ten largest shareholdings, other investments and cash (including accruals), was as follows:
|Ten largest shareholdings||Pence per share||Percentage of investee equity held|
|Hurricane Energy plc||45.2||4.8%|
|FairFX Group plc||41.6||24.2%|
|STV Group plc||27.5||18.1%|
|De La Rue plc||22.4||5.4%|
|GI Dynamics Inc.||5.5||48.4%|
|Board Intelligence Ltd*||5.4||*|
|Leaf Clean Energy Co||4.6||30.0%|
|Allied Minds plc||4.3||2.7%|
|Total of ten largest shareholdings||194.2|
|Cash and accruals||0.6|
*Board Intelligence Ltd is a private company and its shares are not listed on a stock exchange. Therefore, the percentage held is not disclosed.
Investment adviser’s commentary on the portfolio
Over the quarter to 31 March 2019, NAV per share fell by 1%. The top three positive contributors to this NAV movement were Hurricane Energy plc (1.3%), STV Group plc (1%) and Leaf Clean Energy (0.8%). The top three detractors were FairFX Group (-2.9%), De La Rue plc (-0.9%) and Sutton Harbour Holdings (-0.3%).
Northgate plc (“Northgate”)
In March, for only the second time in its eleven-year history, the Fund judged it necessary to requisition a shareholder general meeting (“GM”) to effect change at the board of an investee company. This followed extensive attempts to engage with the executive and non-executive directors of Northgate since the Fund’s investment in April 2016. In direct response to the shareholder GM requisition, Northgate announced on 28 March the resignation of its chairman Andrew Page, with immediate effect.
The Fund’s assessment is that the company has suffered from inadequate strategic leadership, overseen as it is by a board lacking direct career experience within hire industries. In our view, primary responsibility for this lay with Andrew Page. During his tenure as chairman, Northgate delivered a total return of -15.3%, compared to +22.7% for the Numis UK Mid Cap Index (excluding Investment Companies).
The Fund welcomes the resignation of Andrew Page and looks forward to engaging with the company as it seeks a new chairman. We have expressed our view that this should ideally be someone with relevant industry experience, and who will be focused on delivering the best outcome for Northgate’s stakeholders, including recognising and being open to releasing Northgate’s strategic value. The Fund withdrew its requisition for a shareholder GM on 29 March.
Over the quarter, Northgate’s share price fell by 1.5%.
De La Rue plc (“De La Rue”)
De La Rue designs and prints banknotes, produces related components including security features, and also prepares polymer substrate that forms the basis for “plastic” notes. The company also produces individual identity documents and supports the related issuance infrastructure, as well as manufacturing tax stamps, and products and software to authenticate and track individual products throughout their supply chains.
In March 2018, De La Rue’s share price dropped significantly as a result of the joint announcement of a minor profit warning and the CFO’s unexpected departure, followed two days later by news of the company’s failure to secure the renewal of the UK passport contract. At this time, the Fund initiated its investment.
The banknote industry has high barriers to entry due to the critical nature of the product and a relatively conservative base of central banks customers. Although the penetration of electronic payments is increasing rapidly in many countries, the volume of banknotes issued globally is experiencing modest growth. De La Rue has an attractive mix of long-term customer relationships in geographies with relatively high population growth, including various African and Asian countries. The integration of security features into more banknote denominations is also raising the average production value of new notes.
Despite the trends beneficial to revenues from banknote security features and the market tailwinds enjoyed by its identity and product authentication divisions, De La Rue has not delivered underlying earnings growth over the last three years. The primary explanations for this are the loss of a large security features contract towards the end of 2015 and the significant increase in expenditure on both R&D and sales and marketing efforts.
The Fund believes that De La Rue enjoys a combination of strong competitive positions in high return businesses and attractive growth opportunities backed by a capacity for both significant organic investment and the acquisition of further technological competencies. The company also has obvious strategic value, as evidenced by the takeover approach from its competitor Oberthur in late 2010, and the early 2018 acquisition of another banknote producer, Crane Currency, by the US-listed conglomerate Crane Co.
However, De La Rue’s financial performance has been unacceptable, as demonstrated by earnings per share which at March 2015 were 46.1p, grew only slightly to 47.1p two years later, and then declined to 42.9p by March 2018. Moreover, market forecasts for the year to 31 March 2019 place the shares on a PE multiple of less than 10. Despite management speak of a growth strategy, the stock market lacks any evidence as to how growth in earnings per share is achievable. Therefore, in recent months, the Fund has engaged extensively with both De La Rue’s Chief Executive and Chairman. The Fund has made constructive suggestions and specific proposals aimed at solving these fundamental issues. In addition, the Fund has provided suggestions to improve and increase financial transparency with the information that the company can provide to market participants.
The Fund hopes and expects that De La Rue’s management will now effect the change that is required so that market participants can both identify growth and the substantial release of shareholder value.
Over the quarter, De La Rue’s share price fell by 8.9%.
Allied Minds plc (“Allied Minds”)
Allied Minds describes itself as an early stage investor in technology and life science companies. In 2014, it listed on the London Stock Exchange at 190p a share, valuing the company at £398 million. In December 2016, it raised £64 million at 367p a share.
In the period from 1 January 2014 to 30 June 2018, Allied Minds reported total operating losses of $418 million.
Since its formation, Allied Minds has invested in over 40 companies. In 2017, it discontinued funding several portfolio companies to focus primarily on its six largest remaining portfolio companies.
The net asset value of Allied Minds comprises these six entities, another five much smaller investments, plus $50 million of cash as at the end of 2018. Based on the disclosure regarding individual investee company holding values, we estimate that Allied Minds’ net asset value per share currently stands at around 123p.
Last autumn, the Fund initiated a position in Allied Minds and currently owns 2.7% of its issued share capital at a cost of 60p a share, equivalent to a discount of more than 50% to net asset value.
In February 2019, the Fund met with Jill Smith, the Chief Executive of Allied Minds. On 2 March 2019, the Fund wrote to Allied Minds expressing a number of concerns regarding its parent company running costs which, at around $13m per annum, are in the Fund’s view, both excessive and inappropriate.
The Fund also wrote asking on what basis the board of Allied Minds believes it is appropriate that officers of the company are to be paid 10% of gains arising from any investee company whilst the listed company will bear all losses. The Fund regards this practice as both unprecedented and wholly unacceptable. Despite follow up correspondence, the board of Allied Minds has failed to respond to the Fund on this matter.
The Fund also wrote to the board of Allied Minds requesting to understand on what basis it was continuing to award long term incentive shares to staff. In the first half of 2018, the cost of these was $3.9 million. Despite follow up correspondence, the board of Allied Minds has failed to respond to the Fund on this matter.
The Fund believes that there is an urgent need for the board of Allied Minds to re-align its cost base. Eleven companies with negligible revenues should not require an overhead of $13m per annum to manage. The original incubator model that Allied Minds adopted has clearly failed to deliver. Whilst Allied Minds invests in early stage companies, the Fund notes that its core remaining portfolio investments were each initiated several years ago: for example, Spin Memory in 2007, Precision Biopsy in 2008 and SciFluor in 2010.
The Fund believes that a board that has presided over such poor long-term performance at Allied Minds and that sanctions a culture of egregious total compensation payments is not aligned with shareholders, nor is it best placed to deliver for shareholders.
The Investment Manager to Crystal Amber has identified a US-based lawyer with direct experience of running-off and realising assets in a US-based, London-listed investment company. As a consequence, the Fund has therefore written to the Board of Allied Minds suggesting that Crystal Amber’s Investment Manager, in conjunction with the identified US-based lawyer, take over the management of the portfolio of Allied Minds, with total annual costs of running Allied Minds being limited to 1 per cent. of net assets of Allied Minds as at 31 December 2018. The Fund also proposed that in the event that the total portfolio realisations exceeded 80p a share, a performance fee of 10 per cent. would be payable on any excess. On this basis, the Fund believes the annual costs of running Allied Minds would fall by around 70 per cent.
Issue of Shares to charities and transactions in Own Shares
During the quarter, the Fund issued 125,000 shares to five charities following the authority granted at its Annual General Meeting. The Fund also bought back a total of 73,800 of its own ordinary shares at an average price of 204.86p per share as part of its buyback programme.