On a tear

The end August monthly net asset valuation was better than I had anticipated, closing the month at almost 190p a share, up from 161p at the end of July and that's after accounting for the payment of a 2.5p a share interim dividend. So, on the face of it, the good news should be in the price. But it’s not.

That’s because the company’s largest holding, Hurricane Energy (HUR:39.75p), the UK-based oil and gas group focused on hydrocarbon resources in naturally fractured basement reservoirs, has seen a dramatic re-rating in the past week following a drilling update which revealed reserves in the Lancaster field, west of Shetland, significantly greater than previous estimates of 200m barrels of proven, but undeveloped 2C resources. The combination of high flow rates, an extensive oil column and underlying aquifer “materially de-risks Hurricane's plans for a future Lancaster field development and underlines the potential of the fractured basement west of Shetland”.

The news has delivered a healthy tailwind to Hurricane Energy’s share price which, at 39.5p, is a third higher than at the end of August and means that Crystal Amber’s 15.5 per cent stake in the company now accounts for 62p of its net asset value per share, up from 45.6p a share only a fortnight ago. It’s proved a very profitable investment for Crystal Amber as the stake is currently worth £61m, representing a thumping 147 per cent return on its investment. The company also has 23.3m three-year call warrants exercisable at 20p a share which are in the money to the tune of £4.5m, or 4.5p a share of Crystal Amber's net asset value.

It's proved a profitable holding for followers who took up the advice of my colleague Alex Newman who recommended buying Hurricane Energy's shares at 13p ('Here comes the hurricane', 12 May 2016). Clients of finnCap are in the money too, after the brokerage initiated coverage on the shares when they priced at 23p last month, pencilling in a target price of 50p, and that was before news of the reserves upgrade.

So, after adjusting for movements in the portfolio including profits taken on the holding in Restaurant Group (RTN:393p), the chain behind eateries Frankie & Benny's, Chiquito, and Coast to Coast, my calculations suggest Crystal Amber’s top 10 holdings are now worth 184.4p a share, up 12p a share since the end of August. Its other equity investments have a combined value of 13.5p a share, and cash on an ungeared balance sheet is just shy of 4p a share, so this means that net asset value per share is at an all-time high of 202p, or 12p higher than the end August valuation.

Crystal Amber's Portfolio

True, the £61m stake in Hurricane Energy, a company that now has a market capitalisation of £373m, now accounts for 30 per cent of Crystal Amber’s portfolio. But with sentiment positive on the company’s prospects, then the Aim-traded investment company should be able to take some profit off the table when it wants to without impacting the carrying value of its holding too much. Not that its investment advisers may want to do so given potential for further gains. It doesn’t need to either because the fund will shortly receive a cash windfall from the takeover bid for film studio group Pinewood (PWS:562p). Crystal Amber holds a 5.7 per cent stake in Pinewood, worth 18.3p a share, so after factoring this in the company will be holding 11 per cent of its portfolio in cash in the very near future, an ample sum to provide firepower for new investments.

Importantly, I still feel there is decent upside potential in some of Crystal Amber's investments. For instance, shares in residential landlord Grainger (GRI:223p) are rated a third below N+1 Singer’s EPRA net asset value forecast of 339.4p a share for the financial year to end September 2016, up from 319p a share a year earlier, a share price discount that appears out of step with the operational progress being made by the company. Indeed, Grainger has made £91m of sales in the year to date at prices 8 per cent above their September 2015 valuations and has £188m of sales in the pipeline that have either exchanged or are with solicitors. These disposals highlight the upside to historic valuations. Moreover, rents continue to rise on private rental sector (PRS) property and on new lets have increased by 5 per cent in the financial year to date.

Trading 7 per cent below my estimate of spot net asset value, and with the potential for further upside to the investment in Hurricane Energy, I would recommend running your profits on Crystal Amber’s shares. Please note that Crystal Amber has released a lengthy results release this morning which gives full details of all its investments, and the operational progress they are making. Run profits.

Thalassa buys stake in Local Shopping REIT

It hasn’t take long for investors to warm to shares in Local Shopping REIT (LSR:30p), a small cap retail sector-focused property investment company with a market capitalisation of just £24.7m. The company is in the process of selling down its portfolio with a view to returning the cash proceeds to shareholders. The change in investment policy was approved by shareholders three years ago and the completion date for the disposal programme is end 2017. The board have been successful to date, having sold off in excess of £94m worth of assets in the past three years.

Moreover, I expect them to continue to make headway in selling down the remaining portfolio of 336 retail units, worth £76.7m and generating a net rental return of £7.1m, which is why I advised buying the shares at 26.5p three weeks ago (‘Shopping for a property bargain’, 23 August 2016). Bearing this in mind, there is still upside to my realistic liquidation value of £30m, or 36p a share, after deducting net borrowings of £41m secured on the portfolio and after factoring in retained net profits earned by the company between now and end 2017. To put my liquidation value of 36p a share into some perspective, it’s 20 per cent above Local Shopping REIT’s current share price of 30p, but 17 per cent below the last reported net asset value of 43p a share at the end of March 2016. Given this financial return could be achieved in the next 15 months or so, it’s still a favourable one.

But that’s not the reason for this update. The reason is that there has been some major stake building in Local Shopping REIT in the past few trading days by Aim-traded marine seismic equipment provider Thalassa (THAL:41p), a small cap minnow with a market capitalisation of £9m but a company that had net funds of US$20.3m (£15.4m) at the end of 2015. It’s a business I know well, having exited a previously well performing buy recommendation at a small loss a couple of years ago (‘A conundrum to solve’, 7 October 2014). That decision was taken on corporate governance issues concerning a related property transaction involving chairman Duncan Soukup. In hindsight it proved the right call to crystallise the loss as shares in Thalassa have drifted even further, and have been trading well below cash on the balance sheet all this year.

So, the board of the company have decided to deploy some of that cash by acquiring 19.1m shares in Local Shopping Reit, or 23.1 per cent of the issued share capital. Around 6.225m of the holding was acquired for £2.05m at an average of 32.9p a share, and a further 10.43m shares had an average buy in price of £3.6m, or 34.5p a share, so I reckon the total investment has cost Thalassa at least £6.5m. According to Thalassa's interim results release today, the company now has net funds of about £6m including the stake in Local Shopping REIT.

It’s an odd investment to make for a marine seismic equipment provider, but one that has been sanctioned by the board of Thalassa who now intend “to engage with the chairman of Local Shopping REIT as soon as practicable, with a view to reviewing and changing the investment policy which was approved in July 2013". The board of Thalassa believe that the price they have paid, which represents a 20 per cent plus discount to Local Shopping REIT’s last reported net asset value per share of 43p, is a favourable entry point.

I will monitor how those discussions progress, but I would point out at this stage that to embark on a different investment policy from the one the board of Local Shopping REIT are currently pursuing would require shareholder approval. Whether or not the other shareholders who own 77 per cent of Local Shopping REIT’s share capital would back a change of investment policy is another thing altogether. Clearly, some shareholders were happy to get out at the 34.5p price level, hence the reason why Thalassa has been able to build up its £6.5m stake in Local Shopping REIT. But for any change of investment policy to be backed by Local Shopping REIT’s board and gain shareholder approval, it will have to have a better chance of delivering higher returns than the current one is likely to deliver. That’s worth considering for shareholders of both Thalassa and Local Shopping REIT.

Either way, Thalassa’s stakebuilding in the past week has not altered my positive view on Local Shopping REIT. I continue to see upside here with the shares trading on a bid-offer spread of 29.5p to 30p. Buy.