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OPINION

Small caps to buy now

Small caps to buy now
December 3, 2012
Small caps to buy now

Not that the market has yet to fully recognise the progress the company has been making since then. For instance, when I last revisited the investment case in early February the shares were languishing close to a 12-month low at 83p - a hefty discount to my pro-forma calculation of the company's net asset value of 101p, up from 88.7p at the end of December. That estimate proved spot on and, given the attractive mix of investments, this helped drive a sharp re-rating as other investors cottoned on to the value on offer. Nine months later and the chances of another re-rating look firmly on the cards because, yet again, investors have failed to realise just how well the portfolio has been performing.

In fact, the company's net asset value rose from 106.9p to 111.6p during October, which means that the portfolio has not only risen 10 per cent since my last update in early February, but has beaten the FTSE Small Cap index by a healthy 3 percentage points and massively outperformed the FTSE All-Share, which has put in a flat performance in the past 10 months. Moreover, even though the small-cap index has traded sideways since the end of October, Crystal Amber's investments have been powering on up. In fact, mark to market the value of its 10 core holdings and factor in disposals made since the last trading update and I estimate Crystal Amber has a pro-forma net asset value of 116.7p, including net cash of 11.5p a share, or £6.9m. This includes some pretty decent gains in the past four weeks on no fewer than six of the company's 10 core holdings which in aggregate account for 85 per cent of an equity portfolio worth £63m.

 

Crystal Amber's pro-forma net asset value

HoldingPence per shareValue of holdingPercentage of portfolio
TT Electronics15.6p£9.4m13.4%
Sutton Harbour15.2p£9.1m13.0%
Norcros10.3p£6.2m8.8%
Northgate8.3p£5.0m7.1%
API8.0p£4.8m6.9%
Devro7.9p£4.7m6.8%
Tribal6.6p£3.9m5.6%
Smiths News6.5p£3.9m5.6%
N Brown5.8p£3.5m5.0%
Renishaw5.3p£3.2m4.5%
Other investments15.8p£9.5m13.5%
Cash11.5p£6.9m9.8%
Total NAV per share116.7p£70.0m100%

Note: Share prices correct at 28 November 2012

To put this into perspective, this means that the shares, offered in the market at 97.25p, are trading 17 per cent below net asset value. True, a discount of that magnitude would be justified if Crystal Amber's investment performance was lacklustre. But it clearly hasn't been as the company's net asset value has risen by over 31 per cent this year alone, which compares well with any benchmark you wish to choose. For instance, in the year to date, the FTSE small-cap index has risen 18.2 per cent; the FTSE 250 is ahead by 17.5 per cent and the FTSE 100 has turned in a woeful 4.1 per cent gain.

There is a realistic chance that Crystal Amber's investment returns will continue to outperform when you consider that no fewer than six of the fund's 10 core holdings are Investors Chronicle live buy tips. These include: Plymouth marina and property company Sutton Harbour (SUH); shower specialist Norcros (NXR); food producer Devro (DVO); packaging materials group API (API); public sector outsourcer Tribal (TRB); and clothing retailer N Brown (BWNG). We also retain hold recommendations on Crystal Amber's other four holdings: van hire company Northgate (NTG); newspaper distributor and star 2012 Income Tip of the Year Smiths News (NWS); precision engineer Renishaw (RSW) and electronic components group TT Electronics (TT.).

It's worth noting, too, that 13 per cent of the fund is invested in the shares of Sutton Harbour, a holding that is already showing smart gains after Crystal Amber backed a placing and open offer that raised £5.7m at 25p a share at the end of last year. As a result, Crystal Amber's shareholding in Sutton Harbour has increased from 8.5m to 26m shares, or around 27 per cent of the share capital. There is likely to be further upside in Sutton Harbour, too, as at 35p the shares are still priced well below net asset value of 43p even though the company's property portfolio is valued at about £50m, including buildings around its harbour in Plymouth, where void rates are less than 10 per cent, and two car parks with 426 spaces.

As we noted in our tip last month, there is real value to be realised in the portfolio as redevelopment of the nearby Millbay marina has a valuation potential of £6m and realising profit from the old airport could add £16m to shareholders' funds. To put that valuation anomaly into perspective, Sutton Harbour only has a market value of £33.8m, well below its last reported conservative book value of £41.5m and that's before factoring in upside on those property assets. With net debt cut by a quarter to £15.8m there are no financial worries to be concerned with, either.

Packaging materials group, API, is of keen interest, too, after the board put the company up for sale following pressure from major shareholders. The sale process is ongoing, but a sale looks likely after US activist fund and 32 per cent shareholder Steel Partners and 28 per cent shareholder Wynnefield Capital announced they want to sell out. The most likely bidders are trade buyers in Germany and the Middle East and foil-makers in Asia. It's even possible that Illinois Tool Works may bid even though its offer of around 100p a share was turned down seven years ago.

It's worth pointing out that API has a hidden and valuable asset in its New Jersey site which "covers 20 acres within the Manhattan commuter belt and is potentially worth a significant part of its market capitalisation" according to Crystal Amber, adding that even without a bid "reorganisation, investment and marketing initiatives combine to offer share price upside well in excess of 100p". I agree and, with API shares currently priced at 70p in the market, there could be significant upside from this holding, too.

It goes without saying that I rate Crystal Amber, Sutton Harbour and API all as buys.