Crystal Amber lays out case for its portfolio after bumper year – Crystal Amber’s NAV increased by 32.9% over the year to the end of June 2017. They declared interim dividends of 2.5 pence in both July 2016 and December 2016, in line with the dividend policy of 5.0 pence per year.
Including the dividends paid during the period, the NAV total return per share over the year ended 30 June 2017 was 36.1%. Successful exits from investments in Grainger, Pinewood Group and Restaurant Group, realised gains of GBP6.1 million, GBP5.3 million and GBP1.3 million, respectively. GBP15.7 million profit was realised from Hurricane Energy. The main detractors from performance were Ocado (see below – cost them 0.3%), Hansard Global (0.2%) and Sutton Harbour Holdings (0.2%).
New positions were initiated in NCC Group and Ocado Group. They also materially increased the position in GI Dynamics and added to Johnston Press, FairFX, Northgate and STV.
In Hurricane, Crystal Amber invested a further GBP 10.7 million at the company’s placing of shares in October 2016 and taking the Fund’s stake in Hurricane to 15.3 per cent. In April 2017, the Fund announced that it had reduced its position in Hurricane into demand to manage its exposure to this successful investment, realising gains of GBP15.7 million. In July 2017, Hurricane completed a placement of ordinary shares to raise $300 million at a price of 32 pence per share. The company also raised an additional $230 million via the placement of convertible bonds. The Fund invested $10 million in this raising ($3 million equity and $7 million convertible bonds).
The Fund exited its position in Grainger, realising a total profit of GBP6.1 million, (GBP7.1 million including dividends received to date). Following engagement, and as recommended by the Investment Adviser, Grainger undertook a strategic review, streamlined the business, reduced its administrative and other expenses from GBP42 million per year to GBP27.5 million per year and reduced its cost of debt from 5.3 per cent to 3.6 per cent. Following a significant share price re-rating, which saw its discount to net assets narrow from 17.1 per cent at 31 December 2016 to 8.5 per cent in June 2017, the Fund exited its position in Grainger, realising total sale proceeds of GBP37.3 million.
The Fund exited its position in Pinewood, realising a profit of GBP5.3 million. Following the completion of a strategic review, the Pinewood board received and recommended a takeover offer valuing the company at GBP320 million. The offer was made by a real estate fund, Aermont Capital, reinforcing the Fund’s view that Pinewood’s real estate portfolio was undervalued. Taking into account all
realisations since the initial investment in July 2011, the total profit on the Fund’s investment in Pinewood was GBP14.7 million.
The Fund also realised gains of GBP1.3 million on its holding in Restaurant Group and received the final payment following the closure of NBNK Investments, realising a profit of GBP0.6 million.
In addition, over the year, the Fund exited its investments in Providence Resources and San Leon Energy, realising losses of GBP0.6 million and GBP0.5 million respectively.
Crystal Amber is good at explaining the rationale behind its investments. We have reproduced that section of the report here:
Hurricane is an oil exploration company targeting naturally fractured basement rock reservoirs in the West of Shetland. Hurricane controls 728 million barrels of certified resources, including 62 million barrels of reserves, in licences that are 100 per cent owned.
Since 2005, Hurricane has acquired and explored fractured basement rock formations. Hurricane’s assets had, in the past, proven to be oil bearing but had been abandoned due to the view that those reservoirs were not commercial. According to GeoScience, a research services firm, basement reservoirs could hold as much as 20 per cent of the world’s remaining oil and gas resources.
Naturally fractured rock with high permeability allows the oil to rise and collect under a thick layer of shale rock and clay. The fractures provide storage capacity and fluid pathways. This source of oil has been successfully developed in locations in countries such as Vietnam and Yemen, but not yet in the UK.
In our view, Hurricane’s assets stand out due to the size of the resources. In comparison to Hurricane’s resource size, the average North Sea exploration target in 2014 was just over 30 million barrels of oil equivalent (BOE), according to UK Oil and Gas. The Fund’s previous annual reports include additional background information on this investment.
The Fund initially invested in Hurricane at a pre-IPO stage, helping the company secure an exploration rig to drill a horizontal producing well on its core Lancaster licence. The company listed in February 2014 with a valuation of GBP272 million. Despite the success of the 2014 Lancaster exploration campaign, the fall in oil prices from $109 at the time of the IPO to the sub-$50 prices
of the last two years took a toll on the company’s share price. The oil price fall also resulted in a dearth of capital for exploration.
Taking advantage of reduced exploration costs, in April 2016 the Fund and Kerogen Capital, an energy investor, participated in a GBP52.1 million fund raising. This allowed the company to drill two wells which increased the flow rate and resource estimates of Lancaster. To retain the exploration rig at its attractive rental rates the company raised GBP70 million in October 2016, with
our support. The deal also included funds for long lead items necessary for an early production system for Lancaster. The early production system would target first oil production in 2019 and be the first step towards the full field development of Lancaster. It would contribute to the understanding of the reservoir and generate an attractive investment return.
Funds raised also allowed the company to begin drilling at a new licence, Halifax, which it was awarded in November 2016. In March 2017, Hurricane announced that oil at Halifax was of a similar quality to that encountered at Lancaster and was found at even greater depth, indicating that Lancaster and Halifax could form one large structure. The Greater Lancaster Area, which includes Lancaster and Halifax, is 30 kilometres long and, in our estimates, could hold 2 billion barrels of oil.
The Fund sold stock into demand between January and April 2017, and in the process realised gains of GBP15.7 million, whilst retaining a significant position.
In May 2017, Hurricane announced that it was granting 25 million warrants to its Broker, Stifel Nicolaus Europe Limited (SNEL). This had the effect of Hurricane selling its own shares through a market maker, rather than placing its shares with investors. The Fund remains baffled as to why Hurricane embarked on this course and in particular, despite regular dialogue and engagement with the Fund, which was and remains its largest independent shareholder, why on this occasion, it chose not to discuss or consult with the Fund. This, together with an interview given by the company’s Finance Director mentioning that he intended to “pass the begging bowl” to raise funds for the early production system, led to retail investors reducing their holdings and a significant increase in “short interest” in Hurricane’s shares.
Combined with the uncertainty created regarding future funding, Hurricane’s share price fell by more than 50 per cent. In June 2017, the Fund released an announcement expressing its disappointment at Hurricane’s poor handling of the warrant issue and comments made at its AGM earlier in that month.
On 29 June 2017, Hurricane announced a proposed placement of ordinary shares to raise $300 million at a price of 32 pence per share. The company also announced its intention to raise $220 million via the placement of convertible bonds. Proceeds of the placing are to be used to fund the early production system development of the Lancaster field. The early production system is expected to produce 17,000 barrels of oil per day and provide data required to plan a full field development of Lancaster. This project is currently scheduled to achieve first oil in the first half of 2019. The placing was approved at the company’s AGM on 21 July 2017. The Fund invested $3 million in this raising, taking its stake in the company to 8 per cent.
The Fund’s serious concerns regarding the fund raisings, associated comments by Hurricane’s Finance Director and corporate governance weaknesses remain. The Fund also notes that despite an excellent exploration campaign over the last 18 months following the latest fund raise, Hurricane’s enterprise value is less than the amount it has raised from investors since inception. The Fund is currently in dialogue with Hurricane regarding these concerns and will update shareholders accordingly.
Notwithstanding management issues, the Fund maintains the view that there remains a significant disconnect between the operational value of Hurricane and its strategic value. Drilling results over the 12 months to 30 June 2017 indicate that Hurricane holds a very large, quality asset, with a resource that the Fund believes could be in excess of 1.6 billion barrels of oil, significantly undervalued by the current market capitalisation. Indeed, a recent statement from the Chief Executive of BP, specifically mentioned “Hurricane Energy’s big discovery opening the prospect of major new resources west of Shetland.”
Northgate is the leading light commercial vehicle hire business in the UK, Ireland and Spain. Its core product is flexible rental, offering van hire without a long-term commitment at a premium to the cost of fixed term contracts. The company has a fleet of over 93,000 commercial vehicles, available from more than 100 sites across the UK, Ireland and Spain. It currently generates a return on capital employed of 10.5 per cent on GBP510 million of net tangible assets.
Flexible rental is growing because customers can tailor their vehicle fleets to their requirements and have the flexibility to change vehicles as their needs evolve. Northgate primarily serves businesses which vary in size from owner operators to corporate customers. The company benefits from purchasing scale and service capabilities from its own network of garages. Northgate also has its own retail vehicle disposal channel, VanMonster, through which it sells vehicles at the end of their useful rental life.
The Fund first invested in Northgate in 2012, when Bob Mackenzie and Bob Contreras were chairman and CEO of the company, respectively. They were in advanced stages of turning around the company from its debt fuelled rollup strategy which resulted in a rights issue. The Fund supported a re-financing of Northgate’s debt that cut its interest cost from 7 per cent to 2.8 per cent.
Following a re-rating of the shares, the Fund had fully exited its position by 2015 and realised a GBP3.5 million profit. In 2016, it became apparent that Northgate’s turnaround had gone awry in the UK: a planned roll-out into new sites was put on hold and turnover of the sales team reached 40 per cent. As subsequently became clear, Northgate was losing market share. Andrew Page, the
new chairman, had to recruit a new Finance Director and, by the end of 2016, a new CEO as well.
The Fund re-invested in Northgate during 2016 in the belief that Northgate’s share price failed to reflect the strategic value of the company’s position at a time of growing industry consolidation. In June 2016, following a meeting with Northgate’s then CEO, Bob Contreras, the Fund set out its assessment of the company’s prospects with recommended actions, including a strategic review
that could result in a sale of all or part of the business.
At 443 pence at 30 June 2017, Northgate’s shares are trading at a modest premium to the company’s net tangible asset value of 383 pence. The net tangible asset value is roughly the liquidation value of Northgate’s fleet. Over the next three years, we expect the 4 per cent dividend and the return on capital to increase as its UK fleet returns to growth.
STV owns the leading commercial channel in Scotland, where it broadcasts free to air TV through the Channel 3 licence. Following ITV plc’s (ITV) acquisition of UTV Ireland in 2016, STV is the only Channel 3 business not owned by ITV. The channel’s broadcast business generates 80 per cent of STV’s GBP120 million revenues. Other revenue sources include digital advertising sales through the STV Player and third-party programme making through STV Productions. The company has exclusive access to the ITV Network’s content in Scotland in return for an affiliate fee that represents around 50 per cent of STV’s cost base. While TV advertising revenues are cyclical, STV’s content agreement with ITV cushions that impact on STV’s margins. Over the last decade, and despite the rapid growth of digital advertising, TV’s share of the advertising market has remained broadly stable at 40 per cent of total spend. Similarly, TV viewing has remained stable at an average of around four hours per day. STV’s national airtime is sold by ITV and represents 85 per cent of its advertising revenues, with the balance being regional airtime. STV’s peak time viewing figures have remained above ITV’s for seven consecutive years, and this outperformance translates into higher advertising rates.
The Fund initially invested in STV in 2013 when the company was completing its turnaround, having already exited non-core assets and brought net debt under control. During the Fund’s investment period, management has avoided distractions and has delivered consistently on its strategy to deepen the company’s reach within Scotland. Non-broadcast revenues have grown to 23 per cent in 2016, from 11 per cent in 2010. Digital products have been the key contributor to this, in particular “Video On Demand” revenues from STV Player, and they now generate GBP7.9 million of revenues, with a margin of 52 per cent. STV’s digital products have captured data insights from 2.1 million Scottish viewers, a valuable resource for consumer services that the company is only starting to monetise. STV has struggled to grow external production revenues, and it is the consumer division that generates all of STV’s GBP19.7 million operating profits.
In 2014 STV recommenced dividend payments and these have grown seven-fold. Over the Fund’s holding period, net debt has halved and at GBP26.4 million represents one times’ EBITDA. In 2016, the company reached an agreement with its pension scheme trustees over the future contributions to the scheme, clarifying the funding needs of the company.
STV’s share price de-rated for a brief period following the Brexit referendum results and the resulting weakness of advertising markets. The Fund increased its stake over the period from 7.8 per cent to 16.8 per cent and engaged with management over the use of the company’s surplus cash. After the period end, STV announced a buyback programme worth GBP10 million per annum, which the Fund welcomes. Trading at 9 times current year earnings, STV can retire substantial amounts of stock at an attractive price and accrue the most value to its shareholders.
In April 2017, the company also announced that its CEO, Rob Woodward, would step down within 12 months. In August 2017, the company announced that Simon Pitts will join the Board as CEO in January 2018. Simon will join from ITV where he is a member of the executive board, holding the position of Managing Director, Online, Pay TV, Interactive & Technology. Over a 17 year career at ITV, Simon has held a number of senior roles, was central to the company’s recent transformation, and oversaw strong growth in ITV’s digital businesses.
FairFX has been offering international payment services to retail and corporate customers in the UK since 2007. Its payments platform enables low-cost multi-currency accounts and pre-paid cards in a market estimated to be worth GBP 60 billion a year. FairFX can deliver better value to consumers than full-service banks burdened with regulation and legacy systems, or high street
Bureaux de Change providers that carry the cost of retail estates.
Unlike most in the FinTech space, the company grew until 2014 by prudently re-investing profits in product and marketing investments. But like others, it sought to secure funds at a high valuation when it came to list in 2014. The IPO was however too small at GBP2.6 million, providing the company with insufficient growth capital in an increasingly competitive industry. Additional fund raisings were completed in December of the same year and in 2015, but were also in aggregate insufficient to tackle FairFX’s opportunities.
In March 2016, the Fund engaged with the company’s board to undertake a placing at 20 pence per share that would fund materially increased marketing expenditure for growth. In 2016, we saw a step change at FairFX. Transaction revenues are up 28 per cent and international payments turnover is up 49 per cent.
The acquisition of Q Money’s e-Money licence increased the capabilities of FairFX. Additionally, the growth of the executive team underpins FairFX’s move towards general SME banking services. For corporates and SMEs, FairFX can deliver expense management platforms, banking capabilities and payment services in a low-cost environment. The opportunity there is compelling: banks are unattractive to SMEs and offer expensive payment solutions.
The acquisition of CardOne, announced in July 2017, brings a full service digital banking platform as a part of a GBP25 million fund raising which will also help with overseas expansion, marketing and IT.
Leaf is an investment company focused on clean energy, largely in North America. As a consequence of the Fund’s activism, Leaf has been in orderly realisation since July 2014. It currently owns four assets, the largest of which is an equity stake in Invenergy Wind that represents 97 per cent of Leaf’s $102.2 million assets. The Fund’s previous annual reports provide the background on our investment in Leaf and our engagement with the company’s board.
Invenergy Wind is North America’s largest independent privately held renewable energy provider. It has developed over 15,000 MW of generation capacity in over 100 projects. Leaf initially invested $40 million in convertible notes in 2008 and 2009. It elected to convert its interest into a 2.3 per cent equity stake in June 2015. In July 2015, TerraForm Power announced the signing of definitive agreements for a proposed purchase from Invenergy of 930 MW of contracted wind power generation facilities. On 16 December 2015, the transaction closed and on 21 December 2015, Leaf filed a complaint against Invenergy for breach of contract. The complaint alleges that Invenergy was required either to obtain Leaf’s consent to the sale prior to its consummation or, in the absence of such consent, make a payment to Leaf upon the closing of the sale. Leaf did not consent to the sale and Invenergy made no payment to Leaf. The complaint sought payment of $126 million plus interest and the case will be heard in October 2017.
After the filing of the complaint, Invenergy Wind exercised its call option on Leaf’s stake, and Leaf followed by exercising its put option. An appraisal process to determine the market value of the investment resulted in valuations of $73 million from Leaf’s appraiser and $36 million from Invenergy Wind’s. On 30 June 2016, in a partial judgement on the case, the court ruled that Invenergy Wind had breached the contract by not obtaining Leaf’s consent to the transaction. Pending further proceedings, the court has not yet determined the amount of damages, which Leaf argues should be determined by applying the target rate of return of 23 per cent, as agreed between Invenergy Wind and Leaf. On 10 October 2016, the court rejected Invenergy Wind’s argument that the exercise of a put option voided Leaf’s claim for breach of contract.
Leaf is actively exploring its options to realise the value of its other investments in VREC, Lehigh and Energia Escalona.
The full value of Leaf’s claim against Invenergy Wind, with interest but net of tax, is over 95 cents (72 pence) per share. This compares to Leaf’s share price at 30 June 2017 of 37.5 pence and its latest available NAV per share at 31 December 2016, of 77.65 cents (58.8 pence).
The Fund remains confident in the value underpinning the Invenergy Wind investment and that Leaf will successfully realise it.
NCC is an IT support services business with two divisions, Assurance and Escrow, which generate revenues of GBP205 million and GBP37 million respectively. In NCC’s Assurance division, ‘ethical hackers’ advise companies on their cybersecurity needs by undertaking penetration testing, systems monitoring and governance reviews. This breadth of capability is superior to most of its competitors, which include professional service firms such as Accenture and small niche players. In its Escrow division, NCC provides a legal and technical framework to facilitate its customers’ business continuity, should their independent software vendors cease to exist. In the US, Escrow competes against safe record-keeping company, Iron Mountain, but in the UK, its main market, NCC’s Escrow has a dominant position.
Operating in rapidly growing markets, NCC was able to grow revenues by over 25 per cent per annum over the last ten years. Earnings and the share price grew quickly until in 2016 the company issued a profit warning. Conflicts of interest at board level, together with the nature of certain payments made by the company that the CEO later agreed to reimburse, proved to be the tip of the iceberg, but this was sufficient to see the chairman stand down in January 2017. A month later, the company again warned on profits, cancelled a capital markets day due to take place the following day and initiated a strategic review. In February 2017, after three profit warnings, the share price plunged to value the equity at GBP243 million.
After the first profit warning, the Fund assessed the attractiveness of NCC’s markets and the company’s position. The investment was initiated after the February 2017 sell-off. We engaged with the company over the need to replace the CEO, who resigned in March 2017.
During its growth phase, NCC had failed to put in place adequate controls and procedures to monitor and forecast its performance, collect cash promptly and generate business. 2015’s Assurance acquisitions had grown the cost base faster than revenues so that profits were down by 36 per cent in 2017
After 30 June 2017, the Fund expressed its support for the strategic review’s findings. This established the size of the Assurance division’s addressable market at $38 billion and growing at double digits over the next five years. The process changes underway to improve its performance require delicate management. However, they do not require cash investments or risky acquisitions. In our view, as the turnaround benefits accrue, Assurance margins should recover to the previous highs of 17 per cent. We believe that NCC’s stock remains undervalued and the company can rebuild its investor reputation. Cyber security is an exceptionally attractive market, and NCC’s position in it has a strategic value not reflected in its share price.
Ocado is the world’s largest dedicated online grocery retailer with over 580,000 active customers and GBP1.3 billion of sales. It was established in 2001 in the UK with a sourcing arrangement with Waitrose and commenced deliveries to customers. The company’s objective is to provide customers with the best online shopping experience in terms of service, range and price. This has contributed to revenue growth of 14 per cent per annum since its 2010 IPO. Ocado’s performance metrics are outstanding, examples being 99 per cent order accuracy and 95 per cent delivery punctuality. To achieve this, the company has had to tackle the most complex of consumer supply chains, one that mixes over 50,000 stock keeping units with different characteristics of temperature, freshness,
product size and weight.
As online sales grew, the UK’s main grocers developed a proposition utilising their stores. For example, Tesco’s solution includes sourcing goods from its supermarkets and from its so-called “dark stores”, which are not open to the public. This was an efficient strategy when online sales were in their infancy. However, we believe that it has prevented grocers such as Tesco from
successfully tackling the internal changes needed to deliver the best customer proposition efficiently. Meanwhile, we believe that as sales continue to move online, the economics of maintaining a store estate from which to fulfil online orders are deteriorating.
By 2013, Morrisons was the only big UK grocer without an online offering. Its management turned to Ocado to set up its entire service. Within six months, the first deliveries to customers started, with the same excellent customer service standards. With this deal, Ocado evolved its strategy: rather than launch sub-scale retail operations abroad, the company decided to monetise its
expertise by becoming an enabler for other retailers such as Morrisons. This became the Ocado Smart Platform (“OSP”), an end-to-end operating solution for online grocery retail based on proprietary technology and intellectual property, suitable for operating its own business and those of commercial partners.
Judged solely on its price-earnings ratio, Ocado’s shares are highly rated. However, the lack of free cash flows is the result of heavy investment in developing a deep expertise in efficient online grocery solutions. OSP has the potential to transform the economics and generate material free cash flows over the next decade. While the timing of partnerships is uncertain, the trajectory
is visible and we believe the current risk/reward profile to be extremely favourable.
In June 2017, Ocado announced the signing of an agreement with a regional European retailer, a promising indicator. Just a month later, Amazon announced the purchase of Whole Foods, sending tremors through the grocery market. We believe that competing retailers are in a poor position to develop an in-house solution on their own. We expect this to be a game-changer, forcing incumbents to address their online capability.
GI Dynamics is the developer of EndoBarrier, a minimally invasive therapy for the treatment of Type 2 Diabetes and obesity. EndoBarrier is a temporary bypass sleeve that is endoscopically delivered to the duodenal intestine, offering similar effects to the surgical gastric bypass. It received the safety approval CE Mark in 2010, making it commercially available in Europe and several
countries outside of the US.
Founded in 2003 and headquartered in Boston, GI Dynamics listed in September 2011 on the Australian Stock Exchange, with a share price of AU$1.10 and market capitalisation of AU$300 million. Following what the Fund considers to be several remarkable operational failures by previous management, including a terminated FDA trial, GI Dynamics’ share price stood at 6.2 cents at 30 June 2017, valuing the company at AU$34.6 million, approximately GBP20.9 million. Shareholders since listing include Johnson & Johnson and Medtronic Inc.
Since launch, the EndoBarrier therapy has been used in over 3,700 patients worldwide. In 2017, a meta-analysis presented at the Digestive Disease Week meeting reviewed all clinical trials and confirmed its safety and efficacy in reducing weight, HbA1c (blood glucose) levels and the need for insulin and other prescribed medications. EndoBarrier stands as a minimally invasive
alternative to bariatric surgery and pharmacotherapy, which have well documented side effects and safety issues. The prevalence of Type 2 Diabetes and obesity present a market opportunity expected to reach 355 million patients in 2030.
The Fund supports the current management’s strategy to commercialise the device in Europe, initiate a new FDA trial and continue to gather clinical data. This would build on 2016’s successes, including the 300 patient UK trials led by the Association of British Clinical Diabetologists (ABCD) and the data announced from the German registry, which included 243 patients. The company has achieved partial reimbursement in Germany (NUB status 1) and Israel and has received preliminary reimbursement codes in Holland and Switzerland. Regulatory issues from its mismanaged past haunt GI Dynamics: in May 2017, the company announced the suspension of its CE Mark due to administrative failures by the company. We believe that these issues are being corrected in a timely manner.
The Fund first invested in GI Dynamics in 2014 and increased its position in 2016. We have engaged with the company over the strengthening of the board and the departure from its haphazard strategy to focus on fewer, key objectives. We have also advocated listing in London to increase the company’s investor profile in its main European markets. On 3 May 2017, GI Dynamics announced that it had selected Allenby Capital to explore this option. Over the year, the Fund continued to build its position in GI Dynamics and in June 2017, the Fund subscribed to a $5 million convertible note.
The Fund believes that GI Dynamics has a world-class technology, addressing an unmet clinical need, with its current share price a function of shareholder disillusionment resulting from past mismanagement. The Fund continues to work closely with the GI Dynamics’ management and board to fully capitalise on what the Fund believes is GI Dynamics’ highly scalable potential.
Sutton Harbour owns and operates Sutton Harbour in the Barbican, Plymouth’s historic old port. This includes a leisure marina, the second largest fresh fish market in England and an estate of investment properties around the harbour. The Marina at Sutton Harbour is a 5 Gold Anchor rated facility, which can berth securely 523 vessels thanks to its tidal lock that shelters them from
the elements. It is considered to be one of the best deep water harbours in the South West. Ideally located to explore the world-class cruising waters around the South West of England, the Marina remains a popular choice with both regular berth holders and visiting boat owners. In 2013, the company added capacity to its estate by opening the King Point Marina in the neighbouring
Millbay site. King Point Marina now provides berthing for 171 boats. Sutton Harbour also holds the lease to Plymouth’s 113-acre former airport site, entitling it to 25 per cent of any disposal proceeds. Since 2013, Sutton Harbour has remained focused on its waterfront assets, maintaining annuity revenues at its core marina and growing revenues at King Point. The Fund’s
previous annual reports provide further background to this investment.
Since 2016, the company has been exploring options to realise value from its assets, as part of a strategic review assisted by Rothschild & Co.
In June 2017, Sutton Harbour made a preliminary announcement of results for the year ended 31 March 2017. Highlights included a Heads of Terms signed with a major developer for the company’s East Quays site and a record year for the Plymouth Fisheries Hub with GBP19.7 million of fish throughput. As at 30 June 2017, net assets were GBP40.1 million and the market cap of the company was GBP26.5 million, representing a 33.9 per cent discount to NAV.
Johnston Press owns over 200 local newspapers and websites around the UK, including the Yorkshire Post and the Scotsman and a national publication, the i. The company grew by acquisition but got into financial difficulty after the financial crisis due to its heavy debt burden and the falling revenues from lower circulation and reduced printed press advertising.
The current CEO, Ashley Highfield, was appointed in 2011 and started transforming the production process to reduce cost and increase digital revenues. For example, all titles are now produced following the same layout, and more content is either reader-generated or used across titles (e.g. reviews).
In April 2016, Johnston Press purchased the i newspaper, a UK national daily newspaper providing concise quality editorial content. It has a 20 per cent market share of the newspaper “quality market” and was named National Newspaper of the Year in 2015 at the industry’s News Awards.
Investors’ concerns over declining advertising and circulation revenues and questions over the company’s ability to refinance in 2019 might be behind the de-rating of the stock. In our view, the measures put in place by management are slowing the fall in print revenues and growing digital revenues but a timely restructuring of the debt burden is essential and the earlier it is
completed, the more value will be preserved for all stakeholders. The strategic review of financing options for the company is key at this stage and continues to progress.
After the period end, in August 2017, Johnston Press reported its results for the first half of the year, which were broadly in line with expectations: highlights included revenues up 4.6 per cent (excluding classifieds) compared to the same period last year, and a group EBITDA of GBP19.7 million. Performance continues to be driven by the i newspaper, which lifted earnings by 42 per
cent, delivering revenues of GBP14.5 million and EBITDA of GBP3.7 million in the first half of the year and countering ongoing tough trading for regionals, particularly in classified advertising. Digital advertising also performed strongly with revenues (excluding classifieds) growing nearly 15 per cent in the six months to June.
The Fund maintains the view that Johnston Press has the potential to benefit from further industry consolidation.
CRS : Crystal Amber lays out case for its portfolio after bumper year
