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 2019 was 249.12 pence (31 May 2019: 238.37 pence per share).
The proportion of the Fund’s NAV at 30 June 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||54.9||5.0%|
|Equals Group plc||49.8||23.4%|
|De La Rue plc||20.9||6.4%|
|Leaf Clean Energy Co||18.0||25.3%|
|STV Group plc||16.1||11.4%|
|GI Dynamics Inc.||15.4||65.1%**|
|Allied Minds plc||9.1||5.0%|
|Board Intelligence Ltd*||5.8||*|
|Sutton Harbour Group plc||3.2||10.7%|
|Total of ten largest shareholdings||229.9|
|Cash and accruals||-2.7|
*Board Intelligence Ltd is a private company and its shares are not listed on a stock exchange. Therefore, the percentage held is not disclosed.
** Following the unsecured loan notes conversion.
Investment adviser’s commentary on the portfolio
Over the quarter to 30 June 2019, NAV per share grew by 13.6%. Over the year to 30 June 2019, NAV per share total return was 3.9% including the two dividends paid.
The top three positive contributors to the quarterly NAV movement were Leaf Clean Energy Company (7.2%), GI Dynamics Inc (5.0%) and Equals Group plc (formerly FairFX Group plc, 4.0%). The top three detractors were De la Rue plc (-2.3%), Northgate plc (-1.0%) and STV Group plc (-0.3%).
Leaf Clean Energy Company (“Leaf Clean”)
On 2 May 2019, the Delaware Supreme Court awarded Leaf Clean full damages as a result of an investment agreement breach by its investee company Invenergy Wind. This reversed the Court of Chancery’s award of $1 in nominal damages.
On 14 June 2019, the Chancery Court entered its ?nal judgement, ordering Invenergy to pay Leaf Clean US$114.5 million. Leaf Clean received the monies (less withholding tax) on 20 June 2019 and converted the net funds to £77.2m, equivalent to approximately 147p per Leaf Clean share. Prudently, Leaf Clean will retain the capital until all final appeals are resolved. The company intends to continue to return capital to shareholders as soon as it is practical.
Leaf Clean’s shares were up 350% over the period.
GI Dynamics Inc (“GI Dynamics”)
The company continues its preparations for its FDA pivotal trial. This is expected to initiate patient recruitment in the second half of 2019.
In May 2019, the Fund invested in a new US $3 million unsecured convertible note with GI Dynamics. At the end of June 2019, GI Dynamic’s Annual General Meeting approved the issue of the warrants associated with this note and previously issued notes.
The Fund converted its three outstanding unsecured notes at the end of June 2019, with an aggregate principal of $5.75 million. This simplified the capital structure of GI Dynamics as it continues to explore sources of funding for its trial. The Fund retains the warrants associated with the converted loan notes.
GI Dynamics’ shares were up 39.7% over the period.
De La Rue plc (“De la Rue”)
On 30 May 2019, in response to the announcement of its full-year results, De La Rue’s share price fell 34%. This, despite management’s claims that the company’s performance had been “reasonable” and had “broadly met market expectations.” However, these claims did not reflect the reality that the £60 million of management-adjusted operating profits included an unexpected £7 million benefit from an accounting standard change, and ignored an £18 million provision charge related to the supply of banknotes to Venezuela. When we challenged Chief Executive Martin Sutherland as to why the share price fell so dramatically if market expectations had been broadly met, he replied that: “the analysts had got it wrong.”
Along with its FY19 results, De La Rue also announced that Martin Sutherland would be leaving the company following the appointment of his successor. During his five-year tenure, to date, total shareholder return is -22%.
The disclosure within the 2019 Report & Accounts published last month showed that Martin Sutherland’s bonus of £197,000 was not adversely impacted by the £18 million charge mentioned above. We have written to Chairman Philip Rogerson on two occasions to ask for an explanation and to request repayment of this bonus. We have also highlighted our belief that the bonus calculation gave credit for both the £7m accounting change benefit and the earnings from the Venezuelan shipments that were subsequently provided against. The Chairman has chosen not to respond.
Following the Fund’s meeting in June with the Chairman, he subsequently reneged on an agreement to engage with a leading industry player who had indicated to Crystal Amber that it was open to a dialogue with De La Rue to explore mutually beneficial strategic opportunities. As a result of Philip Rogerson’s failure to honour his word to Crystal Amber that he was “happy to have such a conversation,” on 20th June 2019, Crystal Amber wrote to Philip Rogerson stating that: “we have concluded that all stakeholders would be better served if you now stand down from the board.”
On 24th June 2019, De La Rue announced that Philip Rogerson would be leaving the board after a new Chief Executive has been recruited.
The Fund is firmly of the view that Philip Rogerson’s continuing involvement with De La Rue is a significant reason for the continued destruction of shareholder value. The Fund notes that since becoming Chairman in 2012, the share price of De La Rue has fallen from over £10 to less than £3.
Paying bonuses for non-performance and going back on a previous commitment to consider an opportunity to potentially release shareholder value, provide recent evidence of the Chairman’s poor judgment and unacceptable stewardship. These examples are consistent with the Fund’s previous interactions. Accordingly, the Fund believes it to be in the best interests of De La Rue stakeholders that Philip Rogerson does not seek re-election to the board at De La Rue’s AGM on 25th July 2019 and the Fund has advised the board of De La Rue that, unless Philip Rogerson stands down at or before the AGM, it is the Fund’s intention to requisition an Extraordinary General Meeting to replace him. The Fund has identified and spoken with an alternative candidate that it believes would be a far more suitable Chairman, with the appropriate skill set.
Regrettably, such mismanaged and opaque communication overshadowed some positive developments, including a 20% increase in the company’s order book and a 38% increase in its revenue from security features.
The Fund continues to believe that despite the headwinds of poor current leadership, De La Rue enjoys strong competitive positions in high-return businesses with significant barriers to entry, as well as attractive growth opportunities. The company also has obvious strategic value, as evidenced by the takeover approach from its competitor Oberthur in late 2010, and the acquisition last year of another banknote producer, Crane Currency for US$800 million. 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.
In our view, De La Rue has suffered from a lack of strong and knowledgeable leadership, including an insufficient understanding of how to deliver shareholder value relative to investor expectations. This has resulted in an unacceptable financial performance over many years, evidenced amongst other factors by a drop in earnings per share despite tailwinds from the company’s various end-markets.
We believe that the recently-announced board departures create an opportunity to build a higher-quality leadership team able to maximise the value of the banknote business and to capitalise on the opportunities presented by De La Rue’s high-margin authentication activities.
Over the quarter, De La Rue’s share price fell by 20.9%.
Transactions in Own Shares
During the quarter, the Fund bought back a total of 660,000 of its own ordinary shares at an average price of 211.81p per share as part of its buyback programme.