Chrysalis warns on wefox valuation but ‘likely disposal’ still on track

Chrysalis Investments published its interim results for the six months ended 31 March 2024 on Friday. The NAV rose from 134.65p to 147.46p over the period, an increase of 9.5%, and the share price was up by 33.4%, as the discount narrowed to 43.7%. However, the discount has widened again since as more bad news emerges on wefox, once one of CHRY’s largest holdings.

The statement said “Funding options continue to be explored at wefox. The exact structure and option chosen will determine the precise ramifications for the company’s holding, but the balance of probabilities suggest the most viable ones are likely to involve a further decrease in the carrying value of this asset, possibly by a material degree.”

On the plus side, Chrysalis flagged a likely disposal last year [that has been widely reported as being Graphcore], this is said to be on track. There is also news of a new borrowing facility that is being negotiated. The managers observe that “Successfully concluding either of these would at least cover our £50m buffer requirement under the capital allocation policy; together they would provide a significant surplus at over £100m (including our current liquidity). This would equate to approximately 22% of the company’s current market capitalisation. In addition, we are involved in other processes, at different stages of maturity and certainty, which could lead to further significant cash realisations.”

The investment advisers remain focused on maximising investee company potential to boost valuations and closing the discount. Their statement makes specific reference to the potential of an IPO of Klarna, [which could prove transformative for the company]. Over the early part of 2024, Klarna’s CEO gave a number of interviews saying that an IPO is likely to happen “quite soon”, intimating that it might occur in the US. The investment adviser has spelt out the ramifications of such a move already, but at the company’s carrying value, this could imply a liquidity injection of approximately £100m.

The advisers are encouraged by progress at Starling where a new permanent CEO has been appointed and sales of the company’s underlying software “Engine” are coming in [there is no mention though of the FCA investigation into financial crime controls at the bank.]

Board’s comment on wefox

The company provided the market with a March quarter end valuation of its assets on 2 May 2024, which is consistent with the valuation included in these interim financial statements. The company’s carrying value of wefox of £126.5m (or approximately 21p per share) at that date was based on information available to the company at that time in accordance with accounting and market practice. The information included results to 31 March 2024 together with business projections going forward. Those projections noted the need for additional cash in the business to support wefox’s future plans and made provision for how such funds would likely be raised. The company made a further announcement on 17 May 2024 following a Sky News article on wefox, which referred to a Memo to wefox shareholders. The investment adviser reviewed the information contained in that Memo to the information we had available for the 31 March valuation and concluded that there was no material new information.

In the normal course of business, a valuation of the portfolio, including wefox, will be performed as at 30 June 2024 during July and published at the end of July. That valuation will take account of the proposals for how wefox may go forward, which we expect to be at a more advanced stage by then.

If negotiations conclude prior to our 30 June NAV being published in July, we will consider whether it is appropriate to update shareholders on any impact on the carrying value of wefox.

I do not believe it is appropriate to comment on media speculation, but it is fair to say there are a range of possible options being discussed that lead to a variety of outcomes for our investment. These options include recapitalisation of wefox, as well as potential disposals. The exact structure and option chosen will determine the precise ramifications for our holding, but the balance of probabilities suggest the most viable ones are likely to involve a further decrease in the carrying value of this asset, possibly by a material degree.

The investment adviser has proffered a solution to recapitalise wefox, which, with selective disposals, would see the company funded to likely profitability. It believes this proposal has met with the approval of a number of other shareholders.

Chrysalis has expressed clearly to the board of wefox that it expects the directors to implement a business strategy in the interests of all shareholders, in line with its fiduciary duties, and has recommended the use of independent investment banks to oversee the implementation of any disposal strategy. Furthermore, Chrysalis is generally not supportive of situations where the roles of chairman and chief executive are combined.

While I appreciate it is frustrating not to be able to offer shareholders more precision in regard to wefox, at the current point in time, any efforts  to do so are at risk of proving misleading.

[The wefox news is clearly unfortunate, but it still feels to us as though the general direction is positive for Chrysalis. There are obvious catalysts for a re-rating when disposals are made.]

CHRY : Chrysalis warns on wefox valuation but ‘likely disposal’ still on track