16 October
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 September
2019 was 222.31 pence
(31 August 2019: 224.06 pence per share).
The proportion of the Fund’s NAV at 30
September 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 |
46.2 |
5.2% |
Northgate plc |
38.2 |
8.2% |
Equals Group plc |
35.2 |
21.6% |
GI Dynamics Inc. |
30.6 |
71.4%** |
De La Rue plc |
16.8 |
6.9% |
STV Group plc |
12.7 |
8.3% |
Allied Minds plc |
9.3 |
6.9% |
Leaf Clean Energy
Co |
6.6 |
25.3% |
Board Intelligence
Ltd* |
5.7 |
* |
Kenmare Resources
plc |
4.1 |
1.5% |
Total of ten largest
shareholdings |
205.4 |
|
Other investments |
16.4 |
|
Cash and accruals |
0.5 |
|
Total NAV |
222.3 |
|
*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 exercise of warrants on 30 September.
Investment adviser’s commentary on the portfolio
Over the quarter to 30 September
2019, NAV per share fell by 10.8%, or 9.8% adjusting for the
2.5p dividend paid in August.
The top three positive contributors to NAV growth over the
quarter to 30 September 2019 were GI
Dynamics Inc (2.5%), Leaf Clean Energy Co (1.0%) and STV Group plc
(0.5%). Top detractors were Equals Group plc (-6.0%), Hurricane
Energy (-4.0%) and De La Rue plc (-1.9%).
Hurricane Energy plc (“Hurricane”)
Since achieving first oil on 4 June
2019, the company has been producing from its two Lancaster
wells. The reservoir has performed at the higher end of
expectations. Initiatives are under way to increase production over
the next two years. For example, the reactivation of the gas
compression system will enable gas export and increase the
production vessel’s throughput.
Over the period, Hurricane drilled and tested two new wells at
its Great Warwick Area, funded by Spirit Energy as part of their
farm out deal. The Warwick Deep found hydrocarbons in the target
fractured rock, but oil did not flow at commercial rates. The
Lincoln Crestal produced oil at commercial rates and will be tied
back in 2021 to the Lancaster Early Production System (EPS). This
will allow production appraisal and generate additional cash flows
at little additional capital expenditure. One final exploration
well is currently underway.
The excellent results from the EPS have materially de-risked the
company. Whilst the Fund is disappointed that Hurricane’s shares
fell by 18.9% over the period, we are encouraged by management’s
focus on growing cash flows. The operational initiatives in
progress and the addition of the Lincoln Crestal well to the EPS
could see production grow from 2020’s guidance of 17k barrels of oil per day to 30k in 2021. Assuming an oil price of
US$60 per barrel, the base case
guidance for operating cash flow could grow from $200m in 2020 to $300m in 2021. In our view, those cash flows will
underpin the optionality that Hurricane will have to plan its
future development.
Northgate
Having instigated the departure of previous Chairman
Andrew Page, the Fund welcomes the
appointment of Avril Palmer-Baunack
as his successor, and her initiation of a strategic review “focused
on clarifying the significant intrinsic value of Northgate”.
At 325p, Northgate’s shares trade at a substantial discount to
the company’s reported net tangible asset value of 412p per share
as at 30 April 2019.
Northgate’s well-managed Spanish business, which generates over
half of the group’s operating profit, is the clear leader in its
market with a strong brand, good geographic coverage and an
attractive return on assets. Its performance has benefited from a
prolonged macroeconomic recovery, unaffected by Brexit-related
uncertainty. Over the course of several years, the considerable
value of the Spanish business has not been reflected in Northgate’s
share price, and the Fund believes that the company should now
prioritise releasing the value of this asset.
The Fund believes that Northgate Spain would be particularly
attractive to a number of multinationals currently attempting to
increase their presence within the European flexible vehicle rental
market. The business would be worth more to these companies than it
is to Northgate plc and its UK public equity shareholder base,
given synergies such as lower fleet financing costs, ability to
grow an established flexible rental platform across a larger
geographic market, operational flexibility to move and dispose of
vehicles across several left-hand drive countries, and vehicle
procurement savings.
Over the last three years, Northgate Spain has delivered an
average ROCE of 11.6%. Northgate considers its post-tax cost of
capital to be 5.5%, which is higher than those of its larger and
more diversified peers able to operate with greater leverage. If
the Spanish business were worth to an acquirer a conservative 30%
premium to net asset value (equating to a premium of 16% to total
asset value), then a disposal could release over £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.
Over the quarter, Northgate’s share price fell by 5.0%, or by
1.6% including the 12.1p dividend paid.
De La Rue
On 23 July 2019, the UK Serious
Fraud Office announced the commencement of an investigation into De
La Rue and its associated persons in relation to suspected
corruption in the conduct of business in South Sudan. This caused the share price to
fall by 22% over the subsequent two days.
Notwithstanding this unwelcome development and the company’s
disappointing results announcement, the Fund continues to believe
that De La Rue enjoys both strong competitive positions in high
return businesses and a range of attractive growth opportunities.
The company’s total order book grew by 20% over the last financial
year and its security features revenue increased by 38%.
In the Fund’s view, De La Rue has suffered from very poor
leadership and oversight, which has resulted in an unacceptable
financial performance over many years, despite tailwinds from most
of the company’s end-markets and the consequent benefits evidently
enjoyed by its competitors.
In recent weeks, a new Chairman and new Chief Executive have
been appointed. There is early evidence that the new Chief
Executive will adopt a focused and sensible approach targeted at
rebuilding the value of De La Rue’s banknote business and
capitalising on the opportunities presented by its high-growth,
high-margin authentication activities. The new Chairman has also
made clear his determination to ensure that the business adheres to
the highest standards and practices.
De La Rue’s pension liabilities were restructured during its
2017/18 financial year. This, in conjunction with the disposal of
two businesses for over £100m, has substantially strengthened the
balance sheet. Net debt, adjusting the latest announced figures for
the disposal of International Identity Solutions, is only £66m,
which equates to less than one times forecast EBITDA.
De La Rue also has obvious strategic value, as evidenced by the
takeover approach from its competitor Oberthur in 2010, at a
valuation of around two times annual revenue. Crane Currency,
another banknote producer, was itself acquired in 2018 for
US$800 million, which also equated to
around two times expected annual revenue. De La Rue is currently
trading at an enterprise value of less than one times expected
revenue.
Over the quarter, De La Rue’s share price fell by 26.7%, or by
21.2% including the 16.7p dividend paid.
Allied Minds
On 6 August 2019, HawkEye 360, one
of Allied Minds’ top-four portfolio companies, announced it had
raised US$70 million at a valuation
more than double its September 2018
round. The Fund believes that this fundraising added at least 8p to
Allied Minds’ net asset value per share, after accruing for the
Phantom Plan.
On 24 September 2019, Allied Minds
announced the sale of its stake in HawkEye 360 for US$65.6m, which represents the first successful
exit in the 13 years since the company commenced investing.
Disappointingly, the sale reduced net asset value per share by
about 3p, as it was discounted by more than 13% from the valuation
of the fundraising agreed one month earlier. Furthermore, despite
having ceased all new company investment activity, Allied Minds’
management proposes to return only half of the proceeds to
shareholders. Astonishingly, the sale will trigger a cash payout of
almost US$5m out of the remaining
proceeds to current and former executives of Allied Minds under the
Phantom Plan, despite its shareholders having suffered a drop of
around 90% in the share price over the four years since it first
invested in HawkEye 360.
On 4 September 2019, Federated
Wireless, another of the top-four portfolio companies, announced it
had raised US$51 million at a
valuation more than 20% higher than its September 2017 round, adding around 3.5p to
Allied Minds’ net asset value per share. Federated Wireless
received regulatory approval for its Initial Commercial Deployment
on 16 September, allowing it to launch its Citizens Broadband Radio
Service (CBRS) offering and begin to generate meaningful
revenues.
Notwithstanding the recent news regarding HawkEye 360 and
Federated Wireless, the Fund notes that the share price of Allied
Minds continues to trade at a very material discount to its
estimated net asset value. Following the closure of Precision
Biopsy (a company that received at least $26m of funding from Allied Minds) and the
disposal of HawkEye 360, the portfolio will consist of only seven
investments, one of which has already been written to zero. This
makes it all the more difficult to comprehend the increase in the
company’s guidance for ongoing HQ cash operating costs (which
excludes other costs such as severance, share-based payments and
Phantom Plan payouts) from US$5-6m as
announced on 26 April 2019, to
US$7.5m as stated on 26 September 2019.
Over the quarter, Allied Minds’ share price fell by 27.9%. The
Fund believes that the scale of the share price discount has still
not been addressed by the board of Allied Minds and therefore
intends to take appropriate action.
Transactions in Own Shares
During the quarter, the Fund issued 125,000 shares to five
charities following the authority granted at its last Annual
General Meeting.
The Fund bought back 1,260,000 of its own ordinary shares at a
price of 192.56p per share during the quarter, 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