Running small-cap profits

In the event, Crystal Amber’s share price peaked out at 157p at the end of the first quarter, inline with the company’s net asset value at the start of the year. Small cap indices have been struggling to make headway this year, so given its weighting to this segment of the market Crystal Amber has not surprisingly put in a more subdued investment performance too. The company’s latest net asset value is 156.3p, down from 160.8p at the end of June and unchanged from the start of the year. Currently priced on a bid offer spread of 141p to 142.5p, the shares are rated around 8.8 per cent below end of July book value.

I would expect that discount to narrow in the event of an autumn stock market rally and one I have already gone on record as stating is likely (‘Simon Thompson’s market outlook’, 11 August 2014). In that scenario, I would also anticipate an improvement in sentiment towards the perceived higher risk small cap segment. There is scope for enhancing book value through an ongoing share buy-back programme too.

For instance, in the second quarter this year Crystal Amber bought back 1.44m shares at an average price of 149.09p as part of its previously announced buyback policy. It was smart business because a couple of months ago 1.15m of these shares were sold at a price of 158p per share, which equated approximately to the net asset value of the company at the time, in consideration for the acquisition of 5.7m shares in NBNK Investments (NBNK: 45p), representing 10.6 per cent of that company’s issued share capital.

In 2011, NBNK competed against the Co-op to acquire 631 Lloyds TSB and Cheltenham & Gloucester branches, in earlier rounds. However, when the Co-op failed to complete, Lloyds went ahead with plans to float the business, culminating in the recent IPO. Since failing to buy the branches, or find another banking business to acquire, NBNK's operations have been scaled back and costs reduced to a minimum. As a result, the shares had fallen out of favour, so much so that over the second quarter this year, Crystal Amber increased its stake in NBNK to 25.11 per cent, having acquired its holding at 15 per cent below the value of NBNK's reported net cash.

It was an opportune purchase and a low risk one too: NBNK's share price increased by 43.8 per cent between April and June this year, fully justifying Crystal Amber’s investment. The investment accounts for 8.3p a share of Crystal Amber’s net asset value of 156.3p.

Crystal Amber's portfolio at 31 July 2014

Investments with potential

Of the other investments Crystal Amber holds, I am keen on prospects for both Aim-traded property company and marina operator Sutton Harbour (SUH: 31.5p), a company I updated my view on last month (‘Set fair for gains’, 10 July 2014); and also Aim-traded packaging materials group API (API: 73p), a leading manufacturer and distributor of foils, films and laminates used to enhance the visual appeal of products and packaging. I updated my advice on API last month too (‘Packaged for gains’, 15 July 2014). Sutton Harbour accounts for 11.2p a share of Crystal Amber’s book value and API a further 8.1p a share.

I also see upside in the Aim-traded high-yielding shares of Juridica (JIL: 134p), a company that provides funding for civil corporate litigation in cases where the plaintiff has a strong case but lacks the finances or time to proceed. Crystal Amber owns a 4.5 per cent shareholding in the company to account for 8.7p a share of its net asset value.

There is recovery potential in the shares of chocolate maker Thorntons (THT: 108.5p) if the company can deliver the 30 per cent EPS growth analysts predict in the current fiscal year to end June 2015. On this basis, the PE ratio drops from around 13 to 10. Thorntons is one of Crystal Amber’s top 10 holdings, accounting for 10.1p a share of its net asset value of 156.3p.

Another core holding is Tribal (TRB: 174p), a company providing schools and universities with student management systems, inspections and surveys. The shares are rated on a modest 13 times earnings estimates and are a live IC buy tip. Crystal Amber owns 4.6 per cent of the company’s share capital and this accounts for 9.3p a share of its own net asset value.

Keeping an open mind

I do have reservations on some of the other top investments though and I am keeping an open mind on Crystal Amber’s largest holding, AER Lingus (AER: €1.35), the Irish flag carrier whose trading has been negatively affected by the threat of strike action by cabin crew. True, a resolution to labour issues, and clarity surrounding pressure on Ryanair to dispose of its 29.8 per cent stake, could provide the catalyst for realising shareholder value especially as the company retains €585m of net cash on its balance sheet, or the equivalent of 80 per cent of its market capitalisation is €731m. However, given the uncertainty caused by the labour dispute, the board’s current guidance is that operating profit will be 10 to 20 per cent below last year when the company reported adjusted profit of €61m. AER Lingus accounts for 14.3p a share of Crystal Amber’s net asset value.

I am also keeping an open mind on the company’s 15.9 per cent shareholding in Aim-traded investment company Leaf Clean Energy (LEAF: 40p). This stake accounts for 9.9p a share of Crystal Amber’s book value per share. Interestingly, Leaf Clean Energy’s board has just announced that it will pursue a strategy to realise value from its portfolio of investments and return capital to shareholders. If successful, and there is significant execution risk here, then you would expect Leaf Clean Energy’s share price discount to book value to narrow significantly in time given that net asset value is more than double its current share price.

Six weeks ago Crystal Amber increased its holding in Leaf Clean Energy from 10.3 per cent to 15.9 per cent, acquiring over 7m shares at around 30p. Crystal Amber initial acquisition of 11.612m shares in Leaf Clean Energy in October last year valued each share at 46.5p, so I reckon the carrying value of the stake is around the current share price, or well under half Leaf Clean Energy’s net asset value of 85p a share.

Upside/downside risk

Importantly, the team managing these interests are ready to bank profits where they believe maximum value has been realised. That’s always a good sign. Positions exited in the second quarter included newspaper and magazine distributor Connect (CNCT: 154p) and shower supplier Norcros (NXR: 18.2p). Crystal Amber realised profits of £2.7m and £3.9m, respectively, not insignificant for a company with a market capitalisation of £111m.

So having assessed the merits of each company in Crystal Amber’s current portfolio, on balance I can see further upside potential in its portfolio which is now 98 per cent invested in equities. Therefore, if you followed my advice to buy Crystal Amber shares I would continue to run your profits.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'