Literacy Capital (BOOK) has confirmed a 4.7% third quarter fall in assets after its shock exit and loss of most of its £24.4m position in flexible officer provider Cubo Work this month.
The £22.4m write-down following the discovery of “several issues” at Cubo cut the UK private equity fund’s net asset value (NAV) to £271.1m at 30 September. NAV per share fell 22.1p to 450.5p from 472.6p at 30 June.
Uplifts of £4.5m to sausage maker Red Sky, £3.6m to electronic supply chain provider TechPoint and £3.2m to graduate recruitment consultants Grayce offset half of the hit from Cubo and demonstrated “encouraging signs” at all three businesses, BOOK said. TechPoint completed a bolt-on acquisition during the quarter and Red Sky added one in October.
BOOK said its top ten holdings accounting for nearly 94% of net assets saw revenues grow at an annual rate of 37% in the three months to 30 September, their highest in three years, while earnings grew 32%. The comparative figures for the second quarter were 17% and 10% respectively.
Richard Pindar, chief executive of BOOK’s investment manager, reiterated his frustration with Cubo given the strength of performance in its other holdings. “Both our company management teams and the BOOK investment team have worked hard in Q3 to deliver increasing growth for our portfolio companies. Consequently, it is pleasing to report improved trading across much of the portfolio against a challenging macro environment.”
BOOK shares rose 2p to 288p at a 36% discount below their new NAV as the company pledged to remain focused until next year on generating cash from the portfolio. It said it would use this to reduce borrowing and return capital to shareholders through buybacks, tender offers and the issuance of “B”-shares.
It reminded shareholders that its “consistent message” had been about streamlining the portfolio to a smaller number of growth assets. It said since its last new investment in Red Sky in April last year, BOOK had sold four investments and the majority of its stake in bus and train software provider Velociti .
Our view
Richard Williams, senior analyst at QuotedData, said: “It is encouraging to see BOOK formally acknowledge the need to address its substantial discount to NAV, although the announcement offers little in the way of immediate action. The priority remains reducing borrowings and preserving sufficient liquidity to support existing investments, with more substantial capital returns unlikely before 2027 and dependent on further successful disposals. This is understandable given the illiquid nature of the portfolio, but shareholders will be looking for tangible progress, particularly following the recent problems at Cubo Work, which have raised questions about portfolio oversight and undermined confidence in valuations. We have previously questioned the merits of returning capital through a B-share scheme when the shares trade at such a substantial discount and would favour buybacks as a more effective means of enhancing NAV per share. Ultimately, while a clearer capital allocation framework is welcome, rebuilding confidence will depend as much on improved portfolio performance and successful realisations as on discount management.”
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