Small cap value plays

One of the winners is Aim-traded investment company Crystal Amber (CRS: 154p). Shares in the company have rocketed in the past 12 months and are now 56 per cent ahead of my buy-in price of 97.25p ('Small-caps to buy now', 3 December 2012). That's bang inline with the company’s net asset value per share at the end of October and represents a major re-rating of the shares as they were trading on a deep 17 per cent discount to book value at this stage last year. This is partly down to the strong performance of the company's investment fund, but also reflects a share buyback programme that resulted in Crystal Amber repurchasing 5.4m of its shares which took stock off the market and was a major factor in narrowing the share price discount.

Crystal Amber Investment Holdings (31 October 2013)

It clearly worked a treat because with the shares trading at net asset value, and the investment performance strong, the company’s board was able to offload 1m of the shares held in Treasury to an institution at 153.1p last month. That’s rather good business. Moreover, Crystal Amber also sold 3.4m of its Treasury shares at the same price in consideration for the acquisition of 11.2m shares in Leaf Clean Energy (LEAF), representing 8.7 per cent of that company’s issued share capital, from two institutions. That deal also looks good business as it valued each share in Leaf Clean Energy at 46.5p, or half the company's last reported net asset value of 93.8p.

Following these transactions, the total number of Crystal Amber shares held in Treasury has been reduced to 1m and there are 77.1m shares in issue, valuing the company at £117m. More important is that 54 per cent of the investment portfolio is held in ten companies, the majority of which I maintain a favourable view of. That gives me enough confidence to believe that the shares will continue to track upwards with the market and have scope to maintain their outperformance. So, if you followed my original advice a year ago, I would run your bumper profits.

Sutton Harbour set fair

Admittedly, the hefty gains made in Crystal Amber are just as well because one of the other shares I recommended in the same article, Aim-traded Plymouth marina and property company Sutton Harbour (SUH: 28p), has endured a turbulent passage. Crystal Amber still has 6.3 per cent of its net asset value invested in Sutton Harbour, so it is a major holding for the company, too. The good news is that following the release of its interim results this week, Sutton Harbour's share price now looks set fair to make some much overdue progress.

The key take for me in the release was the hike in the company’s net asset value from 38p per share at the end of March to 40.3p per share at the end of September. This reflects a £400,000 net valuation surplus on the company’s investment property portfolio and a £2.3m surplus on the owner occupied portfolio following an independent revaluation by surveyors Jones Lang LaSalle. It also reflects a general improvement in market sentiment and quality of the asset base. The initial net yield on the investment property portfolio is 9.07 per cent which is five basis points lower than at the March financial year-end. In my opinion, there is scope for a further contraction in the yield used to value the company’s properties given the quality in the asset base.

There is also scope for further valuation uplifts irrespective of yield compression because the 171-berth King Point Marina, in the Millbay regeneration area of Plymouth, has been valued at cost in the above accounts as it had not completed at the half year reporting date. But it is now open for business and following the launch of the marina at the Southampton Boat Show, and targeted marketing and open day events, there has been a good level of activity. In fact, around 20 per cent of the berths are now sold and Sutton Harbour reports “an encouraging level of enquiries for the new season”, which starts on 1 April next year.

And this is not the only asset with valuation upside since Sutton Harbour has already outlined its own proposal to develop the 113-acre former Plymouth Airport site, in Derriford. The local council has stated that it wants to create a sustainable mixed-use urban centre at the heart of the North of Plymouth. Sutton Harbour's plans encompass a business park, education facilities, new district centre, commercial and retail units, hotel and housing. The former Plymouth airport site is in Sutton Harbour's books at only £11.5m, or around £100,000 per acre, a bargain price if the development gets the go ahead.

Also, as part of the destination framework to develop underutilised sites within the area, the company has re-submitted an application for 'The Boardwalk', a scheme at Sutton Harbour which will provide 16,000 sq ft in four principal units. The Boardwalk development specifically encourages and addresses demand for quality family dining, and should greatly improve pedestrian access from the west to the north of the Harbour. Strong interest has already been received from national operators for these units.

So, with market conditions improving, the company offering an exciting development pipeline with potential to enhance net asset value, and operating profitably without factoring in any of these development profits, then it’s only reasonable to expect the hefty 33 per cent share price discount to net asset value to narrow over the medium term. There are no pressing financial concerns either since the company has renegotiated a new £22m banking facility with its bankers and which runs to June 2016. True, net debt was £20.2m at the end of September, up from £17.4m in March, but this reflected the capital expenditure on King Point, a development which is now complete. In any case, interest charges are easily covered by operating profits and net debt only equates for just over a half of shareholders funds.

It would also appear that other investors have noted the recent positive announcements from Sutton Harbour as the shares, which have been marking time in a 25p to 29p range for the past three months, are making headway back to the top of their trading range. A break-out above 29p would be very bullish indeed and looks on the cards given that investors are now warming to the company’s return to profitability and valuation gains. Trading on a bid-offer spread of 27p to 28p, I continue to rate Sutton Harbour shares a medium-term value buy.

Packaged for profits and share price gains

I have been taking a close look at the half-year results for Aim-traded packaging materials group API (API: 78p), a company I also recommended buying shares in a year ago when the price was around 70p. It has been a rollercoaster ride since then. At the start of the year a bid for API looked nailed on after US activist fund and 32 per cent shareholder Steel Partners, and 28 per cent shareholder Wynnefield Capital, both wanted to sell out. The problem was that bidders failed to match the board’s expectations and talks ended without a deal being done. That was understandable given that indicative proposals from bidders of below 90p a share failed to acknowledge the progress the company has been making.

In fact, even though pre-tax profits fell by a quarter to £2.9m in the six months to September, broker Numis Securities still anticipates full-year adjusted pre-tax profit of £7.1m, giving underlying EPS of 9.2p, up from £6.8m and 8.7p in the 12 months to March 2013. I still think that outcome is achievable since API's board are expecting a stronger second half. Moreover, last year’s bumper first half performance was always going to be difficult to match and more relevant is the fact that API increased profits by 10 per cent compared to the second half last year. The foils businesses are benefitting from restructuring and the contribution from the laminates operation looks well underpinned by higher volumes and a major new supply contract. The profit estimate is not unreasonable either, considering that API has clients in some pretty defensive sectors - tobacco, beverages and health and beauty products - and three-quarters of revenues are derived from the EU. The UK accounts for a quarter of sales and Europe around a half.

API’s board is certainly confident enough of prospects to have reinstated the dividend, paying out 0.7p a share at the half year stage, its first payment since 2001. A forecast 2p-a-share full-year dividend is covered a comfortable 4.5 times by earnings estimates and means the prospective yield is decent enough at 2.6 per cent. The forward PE ratio is only seven too which is too low considering there are no financial concerns: net borrowings of £5.6m represent only 22 per cent of shareholder funds of £24.9m and interest payments are covered more than five times over by operating profits. Cash generation is pretty robust too.

So, having reappraised the investment case, there are enough positives here to warrant maintaining a positive stance here too and, on a bid-offer spread of 76p to 78p, I continue to rate API a medium-term buy. If the company delivers the bumper second half performance management have led investors and analysts to expect, then a return to last January’s share price highs north of 90p is not an unrealistic possibility.

■ Due to unprecedented demand, my new book, Stock Picking for Profit, has sold out and is being reprinted for delivery the week commencing Monday, 6 January 2014. As a special promotion to IC readers, the first 100 pre-orders for the book placed online with YPD Books and quoting offer code ‘ICOFFER’ will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213. The book is only being sold through YPDBooks and no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge.

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