More upside to come

In hindsight it proved the correct call because when Crystal Amber released an update on its investment portfolio earlier this month, the board revealed that the company’s net asset value had risen by 12.25 per cent from 106.9p to 120p a share in the final quarter of last year. Moreover, the investment holdings have continued to rise strongly since the start of this year, too, so that net asset value figure has increased even further since there have been some pretty decent gains on no fewer than four of the company's 10 core holdings in the first 13 trading days of 2013.

Valuations on the rise

In fact, mark to market the value of the company’s 10 core holdings and I estimate Crystal Amber had a pro-forma net asset value of £75.6m, or 126p a share, at the close of trading on Friday, 18 January. In aggregate these 10 largest holdings now account for 92p a share of that 126p book value, or 75 per cent of the fund. Other investments make up 12.5p a share of net asset value, or 10 per cent of the total. Crystal Amber also has a healthy net cash balance of 21.5p a share, or £12.9m, which gives the fund manager the flexibility to take advantage of fresh investment opportunities when they arise.

To put this into perspective, even though Crystal Amber’s shares, which were trading at 97.25p when I highlighted the investment case last month, have since rallied to 106p, they are still trading 16 per cent below my estimate of the company’s current net asset value per share. True, a discount of that magnitude would be justified if Crystal Amber's investment performance was lacklustre. But that clearly hasn't been the case as the company's book value increased by a hefty 35 per cent in 2012, which compares favourably with any benchmark you wish to choose. For instance, last year the FTSE 250 posted a rise of 22.5 per cent; the FTSE Small Cap index rose 24.4 per cent and the FTSE 100 ended the year up a woeful 5.8 per cent.

Moreover, with the market backdrop positive for equity markets as I explained in my market preview for 2013 (Reasons to be bullish, 21 December 2012), there is every reason that Crystal Amber's investment returns will continue to outperform a rising market especially as 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 promotional marketing specialists 4imprint (FOUR). Since the start of 2012, shares in Tribal and Norcros have both risen by almost 20 per cent and Devro is up by around 9 per cent. These gains far outweigh the 8 per cent fall in Sutton Harbour’s share price in the same period.

In addition, 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.). The latter has seen its share price move up 12 per cent since the end of December, so is showing positive momentum.

Crystal Amber's pro-forma net asset value

Sutton Harbour not on the rocks

True, a sizeable 9.4 per cent of the fund is invested in the shares of Sutton Harbour, a holding that is showing decent gains after Crystal Amber backed a placing and open offer at the end of 2011, but which has come under pressure following last month’s results. In my opinion that is unjust because if you look below the headline numbers it appears more of a case of a new firm of surveyors, DTZ, being incredibly cautious with their valuation of Sutton’s property assets given a lack of deals in this niche segment of the market to provide comparables. The surveyors used a bumper net initial yield of 8.64 per cent to value Sutton's properties at the end of September, which is significantly more than the 8.07 per cent net yield used in the March 2012 valuation and explains the £4.9m valuation shortfall. Importantly, the valuation does not reflect any marked change in marina occupancy rates.

Understandably, investors have been spooked by the property downgrade. But even if we accept DTZ's conservative valuation, Sutton’s shares, at 28p, are still trading a hefty 28 per cent below book value of 38.3p - and that's assuming 5p a share of value has been lost forever, which is hardly realistic. My view is that the markdown in Sutton's shares is an overreaction and can see upside potential, albeit it in the medium-term. I do not see the poor sentiment towards Sutton Harbour as a reason in itself to change my positive view on Crystal Amber.

API ready packaged for a bid

Packaging materials group, API, is of interest, too, after the board put the company up for sale following pressure from major shareholders. The sale process is still ongoing, but a takeover of the company 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, even though API shares have already moved up from 70p to 83p after I flagged up the takeover potential last month, there could be a further 20 per cent potential upside from this holding in the event of a bid for API.

It goes without saying that I continue to rate Crystal Amber shares a short-term buy at 106p and have a new target price of 115p; see speculative upside in API shares to 100p a share in the event of a bid; and rate Sutton Harbour a medium-term buy.

MORE FROM SIMON THOMPSON ONLINE ...

In the past few weeks I have written a number of online exclusive articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:

PV Crystalox Solar (Seeing the light, 21 January 2013)

Bloomsbury Publishing (A publisher for the digital age, 18 January 2013)

Housebuilders first-quarter effectand performance table on all my recommendations from the final quarter of 2012 (Stockpicking Marvels, 16 January 2013)

Eros (A share firmly in the picture, 15 January 2013)

Netcall (Jumping the gun: take two, 15 January 2013)

Moss Bros, Communisis (Jumping the gun, 14 January 2013)

Stanley Gibbons, MJ Gleeson, Spark Ventures (Small cap wonders, 11 January 2013)

IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)

S&P 500 portfolio of dog shares (Dog shares barking back, 8 January 2013)

Air Partner (A share ready to take off, 7 January 2012)

FTSE 100 traded options strategy (Highly profitable options, 3 January 2012)

Telford Homes, MJ Gleeson, Molins, Noble Investments (Rampant bargain shares, 31 December 2012)