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 June 2018 was 244.62 pence (31 May 2018: 230.75 pence per share).
The proportion of the Fund’s NAV at 30 June 2018 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||62.1||6.5%|
|FairFX Group plc||34.9||19.2%|
|STV Group plc||32.1||18.2%|
|De La Rue plc||18.8||3.2%|
|Woodford PCT plc||15.9||2.3%|
|Leaf Clean Energy Co.||8.9||29.9%|
|GI Dynamics Inc||4.3||48.3%|
|Total of ten largest shareholdings||221.8|
|Cash and accruals||-11.4|
Investment adviser’s commentary on the portfolio
Over the quarter to 30 June 2018, NAV per share grew by 18.5%. Over the year to 30 June 2018, NAV per share increased by 19.7%. Including the two dividends paid, NAV per share total return was 22.1%.
The top three positive contributors to NAV growth over the quarter to 30 June 2018 were Hurricane Energy plc (13.0%), STV Group plc (4.5%) and Fair FX Group plc (4.4%). Top detractors were Johnston Press plc (-0.3%), Leaf Clean Energy Co (-0.1%) and Hansard Global plc (-0.1%).
Northgate plc (“Northgate”)
Over the quarter, Northgate’s share price rose by 20.4% as it re-rated to around net asset value. We were pleased to see that Northgate’s share price recovered following the Fund’s public comments in April and its commencement of a more proactive activist role.
The company’s trading update and full year results confirmed that the number of UK vehicles on hire has returned to year-on-year growth – an important milestone if the business is to reverse its market share losses over coming quarters. However, the Fund remains disappointed by the continuing lack of visibility on the prospects for underlying earnings growth and importantly the lack of any catalyst to increase shareholder value.
The Fund believes that there is substantial value in Northgate’s large Spanish business that remains unrecognised by the UK equity market despite repeated evidence of strong trading and financial performance. We continue to press Northgate’s board to consider a sale of this business or a partial listing in order to release this value at a moment of high investor interest in Spanish assets supported by a strong Spanish economy.
The Fund is concerned by the lack of strategic leadership and the communication from Northgate’s Chairman, Andrew Page. In his introductory remarks to last month’s full year results presentation, Mr Page referred to Northgate’s 29% fall in earnings as “slightly depressed”. We consider that he has failed to take responsibility for the under-delivery of the company, both operationally and for shareholders during his tenure.
Despite enjoying the tailwind of a growth market, Northgate’s number of UK vehicles on hire has fallen 11% organically since autumn 2015, when Mr Page was appointed Chairman. The company’s total shareholder return over this period has been -3%, whilst UK equities have delivered over 30%. The Fund notes that the company’s website continues to highlight its total shareholder returns until the end of April 2017 when the share price was 540p, more than 20% higher than the current price.
The Fund would have welcomed Northgate’s directors purchasing shares following the full year results announcement, as a demonstration of their belief in the company’s prospects and undervaluation.
The Fund remains keen for the company to properly consider all available options that might release value.
Ocado Group plc (“Ocado”)
In the second quarter of last year, the Fund commenced building a stake in Ocado. This was a contrarian view, particularly against a backdrop of around 20% of the company’s share capital being shorted by several hedge funds. At that time, we felt that the business was wrongly perceived as simply an online food retailer.
In private engagement with the company, we suggested that it focus on highlighting the growth prospects and scalability of the Ocado Smart Platform (“OSP”) to technology analysts rather than to food retail analysts. We welcomed the decision to separate out the OSP business in segmental reporting.
A year after our investment, the company has closed four deals commercialising its OSP, most significantly with The Kroger Co. We consider that market participants now recognise the value of this scarce asset, sought after by grocers facing the threat posed by Amazon.
As the Ocado share price has rerated very substantially, the Fund exited this position realising a profit of £8.3m.
Leaf Clean Energy Company (“Leaf”)
In April, the company announced a disappointing outcome in its litigation against Invenergy. The Court found that Invenergy had breached its contractual obligations, but surprisingly that Leaf was only entitled to nominal damages. Following legal advice received, Leaf has lodged an appeal to this judgment.
In June, the final Court order set a value of $50.7m for Leaf’s investment in Invenergy. A payment for $36.4m was received by Leaf, with $15.3m paid by Invenergy into an escrow account pending the result of the appeal. At the end of June, the company announced a capital redemption worth £19.5m. In July, the Fund received £5.8m as a cash return and £0.8m as loan repayment.
Following the redemption, Leaf’s market capitalisation is approximately £10m. Leaf has £3.1m (equivalent to 6p a share) in uncommitted cash resources to fund its legal and corporate costs, $15.3m (equivalent to 22p a share) in escrow from the Court order and is appealing for an additional payment of $85.8m (equivalent to 123p a share) for damages.
Leaf’s shares were down 3.1% over the period.
Woodford Patient Capital Trust (“WCPT”)
Over the period, the Fund increased its position in WPCT, a closed end investment fund specialised in early stage companies. It listed in the spring of 2015 and the share price promptly traded at a 15% premium to NAV. With hindsight, this was perhaps the peak of inflated expectations, given the long-term nature of returns of its investments.
At the time of the Fund’s investment in WPCT, not only had the premium eroded, but the shares were trading on a double-digit discount. The Fund believes that the share price represented the trough of disillusionment and was more a reflection of some setbacks within the portfolio of Woodford’s Equity Income Fund.
The Fund has been tracking WPCT for some time. The $150m cash injection in March 2018 into Prothena by Celgene, the world’s largest haematology biopharma company, represented a major endorsement. The Fund commenced purchasing shares immediately following this news flow.
In June, WPCT shares faced selling pressure as a result of leaving the FTSE 250 Index. The Fund took advantage of this index related selling and significantly increased its shareholding. Since then, positive portfolio developments including the listing of Autolus, have contributed to an increase in net asset value to 91.9p at the end of the quarter. The Fund continues to believe that the current share price represents an attractive entry level to access a growth portfolio of highly scalable businesses.
At the period end, the Fund owned 2.3% of WPCT’s issued share capital at an average cost of 78.2p per share. WPCT’s share price increased by 4.6% over the period.
Hurricane Energy plc (“Hurricane”)
Over the quarter, Hurricane’s Early Production System (“EPS”) continued to make progress. The newly-fabricated buoy for the Aoka Mizu arrived in Shetland and the installation of the turret mooring system is underway. The EPS remains on budget and on schedule for first oil in early 2019.
Steven McTiernan was appointed chairman in April. He brings a wealth of experience from his 45 years in the oil and gas industry and investment banking. He was formerly Senior Independent Director at Tullow Oil and is currently chairman of premium listed Kenmare Resources. Having met him before his appointment, we are confident that he will maintain high standards of corporate governance. His extensive M&A experience should help management along the path of monetisation. We are pleased that the Fund’s concerns regarding the need to improve corporate governance and standards have not only been recognised by the company but are now being addressed.
Hurricane’s shares were up 47% over the period, and the Fund realised profits of £7m. This brings total realised gains from Hurricane to £23.6m at the end of the period, when the Fund remained Hurricane’s largest independent shareholder and the Fund’s largest investment.
Transactions in Own Shares
Over the quarter, the Fund bought back 150,000 of its own ordinary shares at an average price of 217.4p per share as part of its buyback programme. These shares are held in treasury, where a total of 1,798,982 ordinary shares are currently held.