Moreover, I feel that we can exploit the likely upside potential in Crystal Amber's portfolio companies, of which the UK's largest listed residential property owner and manager, Grainger (GRI: 247p), a FTSE 250 constituent with a market value of £1.03bn, is the major one, accounting for 23 per cent of the company's net asset value.
Appointments worth noting
What sparked my attention was news this week that Grainger has appointed 40-year-old Vanessa Simms as the group's new finance director to replace Mark Greenwood who retires at the end of December. Ms Simms joins Grainger from Unite Group (UTG: 641p), the FTSE 250 student accommodation provider, where she has been the deputy chief financial officer since 2012. Prior to joining Unite, she was UK Finance Director at industrial property specialist SEGRO, so has important industry experience. Accounting director David Smith will act as interim finance director until Ms Simms takes up her new position in the spring.
In addition, 56-year-old Helen Gordon takes up her role as Grainger's new chief executive on 3 November, earlier than previously planned and two weeks before the company's fiscal 2015 results on Thursday, 19 November, to replace Andrew Cunningham who is retiring. For the past four years, Ms Gordon has been global head of real estate asset management at Royal Bank of Scotland (RBS: 325p) where she built and led a team to significantly deleverage the bank's distressed real estate portfolios and make it more attractive to potential investors. This activity has been prevalent in the house building and private rented sectors (PRS), and included the disposal of a £210m portfolio comprising 1,642 market rented assets, the largest PRS transaction in 2014. Prior to joining RBS, she was property director of Legal and General Investment Management's £4.5bn Life Fund. In addition to owning £4.2bn of commercial property assets, she managed the fund's £2bn development programme, too.
Prospects for maximising asset sales
Ms Gordon's appointment is well worth noting right now. That's because in mid-August Grainger appointed investment bank Lazard & Co in Frankfurt to advise on the disposal of its wholly owned residential property assets in Germany, which are non-core to the company's UK-focused strategy. Grainger currently holds around 5,600 homes in Germany which had a market value of £311m at the end of March 2015. I would anticipate the company to report growth in the value of these assets at the forthcoming full-year results given the strong market for residential property in Germany.
The point being that Grainger could not have appointed a better qualified individual to oversee the sale to maximise returns for shareholders. The capital released from the disposal will help accelerate the company's strategic focus on its UK residential activities where Grainger owns 8,400 properties as part of a market rented portfolio worth in excess of £1.1bn, including 3,400 homes in the UK where it is the market leader in equity release schemes principally for retired home owners. The company plans to complete 1,070 market rented units over the next two years.
Break-out on the cards
The key here is that I can see investors warming to Grainger's shares given that they trade on a near 20 per cent discount to analysts' estimates of EPRA net asset value per share even though the UK housing market is clearly strong, and a new management succession structure is now in place. Indeed, this appears to be happening and a move above the summer high of 254p would signal important break-outs on the swing and point & figure charts, and ones well worth following.
The technical indicators suggest such a move is certainly on the cards: the 14-day relative strength indicator has a reading of 60, so is not that overbought, indicating the share price has ample scope to continue to re-rate; the moving average convergence divergence (MACD) momentum oscillator is above both its signal line and zero, and has also just given a buy signal; and Grainger's share price is modestly above its 20-day exponential moving average (at 241p), and its 200-day moving average (225p), so is not overly extended above its important short-term and long-term trend lines.
Trading on a bid-offer spread of 246.5p to 247p, I rate Grainger’s shares a trading buy on a three month basis in order to exploit a likely narrowing of the share price discount to book value and the expected positive newsflow from the sale of the Germany residential portfolio. Needless to say a re-rating towards my initial target price of 280p would be positive for shareholders of Crystal Amber as every one per cent move in Grainger's share price adds almost 0.4p a share to the company’s net asset value of 166p.
Dart Group's profits in the ascent
And that's not the only catalyst for Crystal Amber that's coming into play as Aim-traded Dart (DTG: 465p), the parent company of leisure airline Jet2 and distributor Fowler Welch, has issued its third profit beat since the summer. To put this into some perspective, at the time of the final results in July analysts at Arden partners upgraded their fiscal 2016 pre-tax profit estimate from £52m to £60m for the 12 months to end March 2016, reflecting "the good start to the new financial year, and strong demand for holidays". At the annual meeting on 3 September the company report buoyant trading in its leisure business throughout the summer and this prompted Arden to lift those estimates again, from £60m to £75m.
And in a pre-close trading update ahead of interims due to be released on Thursday, 19 November, the company has revealed that its trading performance is materially ahead of the first half last year, reflecting a record load factor of 94.1 per cent in the six-month trading period, a 21 per cent rise in more profitable holiday passengers, and an increase in average ticket yield of 16.4 per cent. Clearly, the weak oil price is supporting a benign cost environment for airlines, while on the demand side the weakness of the euro has been tempting UK holidaymakers to travel overseas on short-haul breaks. These dynamics have been reflected in trading statements from other UK tour operators and low-cost airlines as well.
The bottom line is that Dart's first-half operating profit is likely to be at least 60 per cent ahead of the same period in 2014 when the company reported profits of £89.4m. Of course, this business is seasonal with all the profit being made in spring and summer and the winter months reporting losses. Nonetheless, analysts at Arden now expect full-year pre-tax profits to rise by almost 90 per cent from £50.8m to £95m to deliver EPS of 51.3p, up from 28.4p in fiscal 2014, and support a 25 per cent plus hike in the dividend per share to 3.8p. On this basis, Dart's shares are being priced on 9 times likely earnings estimates and offer a 0.8 per cent forward dividend yield.
Prospects for 2016/17
True, there is little visibility on booking for the 2016-17 financial year, and there is no guarantee that the oil price and euro will remain as weak over the coming 12 months. That said, in my view the market is failing to recognise that the company's hedging policy on fuel is set to deliver a significant tailwind to costs in the next financial year, and one that will help offset the effect of increased industry capacity on margins. Moreover, holiday passenger numbers are predicted to rise from a third of the total to exceed 40 per cent in the 2016-17 financial year and account for two thirds of divisional revenues compared with 54 per cent in the last fiscal year. That's important because package holidays are much higher margin, generating three times' as much revenue per passenger.
As a result I feel that Arden's forecast that margins will 'normalise' next year and result in pre-tax profits falling back to £65m on revenue of £1.5bn is far too conservative for a business that is clearly benefiting from the positive impact on consumer spending from the ongoing UK economic recovery, and the low interest rate and low inflation environment.
I also feel that the company's cash pile is going to balloon from £294m at the end of March 2015 to conceivably as high as £380m, or more than half the market capitalisation, at the end of September 2015, reflecting the bumper profit earned in the period and seasonal cash inflows. The operating cash flow statement will make for eye-catching reading.
So with Dart's shares priced on 9 times current year earnings estimates, and 2016-17 analysts' estimates erring on the cautious side, I believe there is scope for Dart's shares to outperform in the next three months or so and take out September's all-time high of 500p. Ahead of the results release on Thursday, 19 November, I also rate Dart's shares a trading buy on a bid-offer spread of 468.25p to 468.75p. The holding accounts for 6.5 per cent of Crystal Amber's net asset value.
Interesting developments at Leaf Energy
I read with great interest the interim results of Leaf Clean Energy (LEAF: 38p), the Aim-traded clean energy investment company which is in the process of selling off its assets and returning cash to shareholders. Crystal Amber owns 29.9 per cent of the shares in issue and the holding accounted for 10 per cent of the fund's latest net asset value of 166p.
Following asset sales, the company returned $10.1m (£6.44m) of cash to shareholders earlier this month by buying back 8.22 per cent of the shares in issue through a mandatory redemption at 60.82p a share. Adjusting for this capital return which was worth 5p a share, I estimate that the company now has a net asset value of $110m (£71.3m), or 60.3p a share based on 118.16m shares in issue. So with Leaf Energy's shares being priced at 38p, valuing the company at £45m, the share price discount to book value is 37 per cent. Net cash is around $6.5m post the capital return, a sum worth £4.2m or just under 10 per cent of Leaf Energy's market capitalisation.
The investment portfolio of four holdings is currently in the books for $114m (£73.8m) on a proforma basis of which the investment in Invenergy Wind LLC, North America's largest independently owned wind power generation company, is by far the largest and most important holding. Leaf Energy originally invested $40m in Invenergy and in its latest set of results the company revealed that it had converted its convertible loan notes into equity representing 2.3 per cent of Invenergy’s issued share capital.
That’s important because after 22 December this year Leaf Energy has the right to put the shareholding to Invenergy with the sale price either agreed between the two parties, or by a third party independent appraiser. By the same token, Invenergy has a similar option to call the interest and the purchase price will be determined in the same manner.
A potential scenario
The timing of the conversion of the loan notes into equity is very interesting because Invenergy is currently in the process of selling 930 mega watts of wind power capacity for $2bn (£1.3bn) to New York Stock Exchange listed TerraForm Power (TERM:NSQ - $19), a company with a market capitalisation of $2.7bn. This highlights the attractions of so called "yieldcos", entities that acquire and operate income generating assets from developers and operators such as Invenergy. The sale is expected to close by the year-end, although there is no guarantee that it will.
But if it does, Invenergy could use part of the sale proceeds to buy back Leaf Energy's 2.3 per cent stake which the directors have valued at $95m (£61.5m) in the latest set of accounts. And they may well be tempted to do so because Leaf Energy's board believes it is entitled to a cash windfall from the proposed sale of Invenergy's assets which could be as high as $113m if the transaction completes by the year-end. The directors of Invenergy don’t believe this is the case and Leaf Energy's auditors have not factored in any windfall into the net asset value reported in the company's latest set of accounts. I haven’t either.
But my take on this is that there are reasons to foresee an agreement being reached between the parties to enable the TerraForm Power sale to proceed as planned, and for Leaf Energy to realise the value of its equity investment in Invenergy. In the circumstances, I will be monitoring the situation closely as this has potential to reap yet another decent cash return and valuation uplift for Crystal Amber's shareholders given that the stake in Invenergy is worth 36 per cent more than Leaf Energy's own market capitalisation. Needless to say I continue to rate Crystal Amber's shares a buy in light of the latest developments.
MORE FROM SIMON THOMPSON...
I have published articles on the following 50 companies in the past month:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initital target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale (‘A quadruple play’, 22 October 2015)
■ Simon Thompson's 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
