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 December 2019 was 179.21 pence (30 November 2019: 195.23 pence per share).
The proportion of the Fund’s NAV at 31 December 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||36.1||5.1%|
|Equals Group plc||35.0||21.4%|
|Allied Minds plc||23.1||17.7%|
|De La Rue plc||23.1||14.6%|
|GI Dynamics Inc.||11.4||73.1%|
|STV Group plc||8.5||5.0%|
|Board Intelligence Ltd*||6.5||*|
|Kenmare Resources plc||4.8||1.8%|
|Sutton Harbour Group plc||2.9||10.8%|
|Total of ten largest shareholdings||171.9|
|Cash and accruals||-1.5|
*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 December 2019, NAV per share fell by 19.4%, or by 18.3% adjusting for the 2.5p dividend accrued during the period. The dividend was declared on 10 December 2019 and paid on 13 January 2020.
The top three positive contributors to NAV over the quarter to 31 December 2019 were STV Group plc (0.3%), Board Intelligence Ltd (0.3%) and Allied Minds plc (0.2%). Top detractors were GI Dynamics Inc (-10.0%), Hurricane Energy plc (-4.3%) and De La Rue plc (-2.8%).
GI Dynamics Inc (“GI Dynamics”)
On 14 January 2020, the Fund fulfilled its commitment to extend a $4.6m convertible loan note to the company, intended to fund commencement of the Endobarrier trial for treatment of type 2 diabetes.
The Fund negotiated and commenced a board observer position in November 2019. As a consequence, the Fund is not in a position to comment on the company other than by reference to public announcements made by the company.
Over the quarter, the closing bid price of GI Dynamics’s shares fell by 65.1%.
Hurricane Energy plc (“Hurricane”)
Over the period the company drilled and tested Warwick West. This completed on time and on budget the three-well 2019 programme funded by Hurricane’s JV partner, Spirit Energy. The programme confirmed reservoir productivity from Lincoln Crestal, where oil had been discovered in 2016, at depths 500 metres deeper than at Lancaster. It has also confirmed oil in a separate fault-bounded area within the Greater Warwick Area. Warwick West proved light oil, of similar character to Lincoln and Lancaster. However, the stabilised flow rate achieved on test was significantly lower than at Lincoln and Lancaster. A detailed review of the results will be required to understand whether the Warwick structure is commercially viable. The Lincoln one, however, will now proceed to production appraisal via tie-back to the Lancaster Early Production System (EPS). The 2019 drilling results are a reminder of the complexity in exploration and specific risk in a fractured basement reservoir.
The EPS continues to deliver oil in line with guidance. The headline production figure of 2.8 million barrels of oil sales with average production 13,300 barrels / day since start-up is very satisfactory. For 2020 brokers estimate that with 18,000 barrels per day of production at $65 per barrel the company should generate $270 million in operating cash flow. The addition of well stock and debottlenecking activities to increase the EPS vessel productivity to 40,000 barrels per day should see operating cash flow grow to $400 million in 2022.
Cash generation gives Hurricane optionality to explore, invest to increase production, or consider returns to shareholders. At the current share price, the Fund believes that a buyback of shares could be an attractive use of capital in the interest of the company.
Over the quarter, Hurricane’s share price fell by 21.4%.
Allied Minds plc (“Allied Minds”)
On 20 November 2019, the Fund requisitioned an EGM of Allied Minds with the aim of changing the composition of its board to help accelerate and maximise both cost reductions and cash distributions, and thereby address the persistent and substantial discount of its share price compared to NAV.
On 11 December 2019, Allied Minds announced a range of developments which, in the Fund’s view, collectively represent a significant improvement for shareholders. These include a USD1.5m reduction in recurring HQ expenses guidance, an increase in the initial cash return from the sale of the HawkEye 360 stake, the introduction of a cumulative cash returns threshold before any further payments can be made under the Phantom Plan, and the appointment of the Fund’s proposed new non-executive director, Mark Lerdal, in place of one of the existing Allied Minds’ non-executive directors. On the basis of this package of changes, the Fund agreed to withdraw its EGM requisition notice.
Allied Minds’ shares trade at around a 40% discount to the Fund’s estimate of its NAV per share. Its current market capitalisation, excluding estimated parent-level cash, is around $67 million, which is less than the value of the stake in Federated Wireless alone (as implied by that company’s fundraising round in September 2019). Allied Minds also owns two other sizeable holdings in Spin Memory and BridgeComm, both of which have raised capital from third parties including strategic investors, as well as three smaller investments.
Over the quarter, Allied Minds’ share price fell by 2.1%.
De La Rue plc (“De La Rue”)
On 26 November 2019, De La Rue announced its interim results. For the full year to March 2020, guidance for adjusted operating profit was set at £20 million to £25 million, significantly below the consensus forecast. In response to the cash outflow experienced during the first half, De La Rue sensibly decided to suspend its dividend.
De La Rue’s guidance implies that the Currency division is expected to be loss-making this year, primarily driven by lower banknote printing and security features volumes following the withdrawal of Venezuela from the market, triggered by US sanctions. In contrast, the Product Authentication & Traceability division grew revenues by 70% year-on-year in the first half and generated an operating margin of 23%.
The company’s auditors required De La Rue to characterise as a “material uncertainty” the risk that, in a multiple-downside scenario and with no mitigating action taken, the company might breach a bank debt covenant. This attracted significant press coverage and contributed to the 23.5% stock price fall on the day of announcement. Our analysis indicates that the company is unlikely to breach its covenants, especially given the expected partial reversal before year-end of the working capital cash outflow seen in the first half. The share price weakness may have been compounded by the inevitable selling by some income funds following the dividend cancellation.
We are encouraged that De La Rue’s new CEO, Clive Vacher, committed to delivering and exceeding the £20m cost-cutting target earlier than the original FY22 timescale. This will return the Currency division to significant profitability even if the banknote printing cycle has not yet improved. We are also pleased to see that the CEO and several other senior executives have purchased De La Rue shares following the results announcement.
The Fund believes that De La Rue’s current valuation of less than one times expected revenue certainly does not reflect either the operational upside, now that new management is at the helm, nor its strategic value when compared to previous deals within the sector priced at around two times expected revenue.
Over the quarter, De La Rue’s share price fell by 36.3%.
Northgate plc (“Northgate”)
At 298p, Northgate’s shares trade at a substantial discount to the company’s reported net tangible assets per share of 414p as at 31 October 2019.
As previously stated, the Fund believes that Northgate’s well-managed Spanish business would be an attractive acquisition candidate for a number of multinationals currently attempting to increase their presence within the European flexible vehicle rental market. These larger and more diversified peers operate with greater leverage and lower costs of capital than Northgate and would be able to realise multiple synergies unavailable to Northgate.
If the Spanish business was worth a conservative 30% premium to net asset value to an acquirer, then a disposal could release around £300m of proceeds, net of debt repayments. At the current share price, investors in Northgate would then be paying less than one third of net asset value for the residual UK and Ireland businesses. The Fund hopes that Northgate’s ongoing strategic review will conclude it is in shareholders’ interests to initiate an auction of the Spanish business.
Northgate’s share price has fallen by 13% since it announced the acquisition of Redde plc (“Redde”) on 29 November 2019, adjusting for the interim dividend. This compares to a +6% total return from the NSCX index over the same period.
The company proposes to incentivise its combined senior executives with a new “Value Creation Plan” which would pay out a portion of total shareholder return over a three and a half year period, with the initial grant to be based on the share price following shareholder approval of the Redde acquisition. The current share price of 298p, compounded at the initial 5% hurdle rate, would mean that management would receive performance payments for achieving a share price in 2023 above a level of only around 353p (pre dividends). This compares to Northgate’s closing price of 350p the day before the acquisition was announced. The Fund believes that the basis for such an incentive scheme should be struck at a minimum at the pre-deal share price of 350p.
The Fund also notes that Northgate and Redde are together due to pay fees of more than £25 million to professional advisers in relation to the proposed deal. This is equivalent to more than 7.5% of the market capitalisation of the target company, Redde. The Fund is deeply disappointed by the quantum of these fees, particularly in the context of the transaction being an all share deal, with no costs incurred in raising capital.
Over the quarter, Northgate’s share price fell by 3.8%, adjusting for the interim dividend.
Transactions in Own Shares
Over the quarter to 31 December 2019, the Fund bought back 1,027,413 of its own ordinary shares at an average price of 135.24p per share as part of its buyback programme.
For further enquiries please contact:
Crystal Amber Fund Limited
Chris Waldron (Chairman)
Tel: 01481 742 742
Allenby Capital Limited – Nominated Adviser
David Worlidge/Liz Kirchner
Tel: 020 3328 5656
Winterflood Investment Trusts – Broker
Joe Winkley/Neil Langford
Tel: 020 3100 0160
Crystal Amber Advisers (UK) LLP – Investment Adviser
Tel: 020 7478 9080