Crystal Amber Fund (CRS) announced its annual results for the year ended 30 June 2024 as the company continues the realisation of its assets. The company delivered a NAV per share increase of 86.3% from 93.3p to 173.9p a share. The NAV rose from £77.7m to £126.7m.

During the year, the fund continued its policy of monetising the portfolio in an orderly manner in order to maximise value received and making timely returns of capital. In the same period, 10.4m shares, equivalent to around 12.5% of the issued share capital were purchased for cancellation at an average of 80.19p a share, which had the effect of increasing the year end NAV per share by 6.7%. This represents buying in at a 53.9% discount to net asset value at the year end. Following the year end, an additional 1.3m shares (or around 1.8% of the issued share capital) were acquired at an average of 104p a share. This has brought total returns of capital, including share buy backs, to more than £110m to date.

Discussing the results, chairman Christopher Waldron commented:

“Last year, I commented that in the course of a prolonged period of intense and ultimately successful activism, the fund purchased an additional 15.3m shares in De La Rue at a cost of £6.3m. This resulted in the fund increasing its holding in De La Rue to close to 17% of its issued share capital, up from less than 10%. Subsequently, De La Rue’s share price rose by over 130% in the 12 months to 30 June 2024. I also noted that, at a time when the currency market cycle was improving, the fund remained of the view that the strategic value of De La Rue was substantially more than its then market value, in an industry requiring consolidation.

“This view was reinforced in May 2024 when De La Rue reported that the order book at its currency division had increased to £241m, up from £137m at 31 March 2023. De La Rue also announced that it was in discussions with a number of parties who had made proposals in relation to or expressed interest in both its currency and authentication divisions. This culminated last month with De La Rue reporting that it had entered into a definitive agreement for the sale of its authentication division to Crane NXT for a cash consideration representing an enterprise value of £300m. For the year to March 2024, the division reported an adjusted operating profit of £14.6m, meaning that the price represents a multiple of more than 20 times operating profits and 2.9 times revenue.

“The fund believes that after proceeds are received from the sale of the authentication division, all bank debt and pension liabilities can be settled, leaving De La Rue with net cash of around £140m. Its remaining currency division has attracted interest from trade buyers, and the fund believes that De La Rue could sell this division for at least £150m. While the price achieved for authentication significantly exceeded analysts’ expectations, it matched the fund’s previous publicly stated target, given its strategic importance. The fund believes that the price achieved will only serve to increase competitive tension for the disposal of the currency division.

“During the year under review, the fund disposed of its remaining holding of Prax Exploration Deferred Consideration Units (DCUs), following the acquisition of Hurricane Energy Plc by Prax Exploration. This brought total proceeds from the DCUs to £12.5m, realising a profit of £2.3m.

“Shareholders will recall that in June 2021, the fund successfully prevented a debt-for-equity swap in the High Court, which would have resulted in 95% dilution of the ordinary shareholders. Ahead of the court case, shares in Hurricane Energy Plc were trading at 1p per share. Following the disposal in May 2024, total proceeds received by the fund were 8.2p per share on its holding of 575.6m shares.

“As the process of monetising the company’s portfolio has continued, there has been increasing focus on the largest remaining holding, Morphic Medical Inc (MMI). MMI is a privately held company, headquartered in Boston, MA, that has developed an endoscopically delivered medical device for patients with type 2 diabetes and obesity. The device is called RESET, formerly known as the Endobarrier. RESET is a thin, flexible implant that lines the proximal intestine and mimics gastric bypass bariatric surgery as food bypasses the duodenum and the upper intestines. The investment manager believes that MMI’s RESET device can deliver superior and durable results without changes to the anatomy.

“In June 2024, the company reported that MMI had received approval from the US Food and Drug Administration (FDA) for MMI’s application to amend certain requirements for its pivotal study, which is approved as a staged study. These protocol changes are expected to significantly accelerate access to the key US markets for the treatment of diabetes and obesity, subject to, inter alia, successful completion of the study and trials.

“MMI is also in very advanced stages of securing CE Mark certification, which is expected in the coming weeks.

“Over the last three years, against a backdrop of poor UK equity markets (the AIM index has fallen by around 40%), the fund has successfully exited several illiquid positions at premiums to carrying value. Moreover, the board notes that the investment manager’s dogged determination, perseverance, and acumen have resulted in transformational and positive outcomes at both Hurricane Energy and De La Rue.

“When we look back at the last three years, we see that the UK smaller companies investment companies index has fallen by 9.2%. Over the same period, the fund has delivered a return of 68.4% (source: Trustnet). However, there still remains substantial value within the portfolio, and the board is confident that De La Rue can deliver significant further growth in net asset value as well as a very substantial cash monetisation. In addition, MMI provides our shareholders with the potential to benefit from its market positioning in a sector set to enjoy substantial growth in the coming decade.

“The company continues to pursue its strategy of maximising capital returned to shareholders by way of timely disposals, and while this has taken longer than expected, primarily because of events at De La Rue and MMI, investments have increased in value in the period as noted above. As the company will not have realised all of its investments by 31 December 2024, it is intended that the board will consult its larger shareholders and/or make arrangements to seek shareholder approval on the future strategy of the company by the end of the first quarter of 2025, including steps that might be necessary to maximise the opportunity to realise value from the remaining assets of the company.

“In particular, as MMI is very likely to be the last investment held by the company, there will need to be careful consideration of the best structure through which to hold this investee company in order to maximise its potential in a cost-efficient manner.”

CRS : Realisations deliver gains for Crystal Amber Fund over 2024