17 July
2019
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% |
Northgate plc |
36.7 |
7.6% |
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 |
|
Other investments |
21.9 |
|
Cash and accruals |
-2.7 |
|
Total NAV |
249.1 |
|
*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.
For further enquiries please contact:
Crystal Amber Fund Limited
Chris Waldron (Chairman)
Tel: 01481 742 742
www.crystalamber.com
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
Richard Bernstein
Tel: 020 7478 9080