Nigel Somerville’s share tips for 2015 – No 2 Core VCT (CR3) and Core IV VCT (CR4)

Comments

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   Tim J Grattan

   28 December 2014, 17:08

   The travails of Core VCT shareholders have been chronicled over the last few years on the Motley Fool VCT message boards. These threads in particular discuss the prospects and the discounts for the three Core VCTs (and the Core VCT B shares).
   http://boards.fool.co.uk/rotten-to-the-core-12767986.aspx?sort=whole#12767986
   http://boards.fool.co.uk/en-core-13128919.aspx?sort=whole#13139631

   Whilst I agree with the basic premise of the article that both Core VCT and Core 4 VCT shares offer good value, there are couple of other important points that I think should be highlighted.

   Based on the closing prices on December 24th, Core 5 VCT (not mentioned in the article) offers somewhat better value than Core 4 VCT as it is quoted at a lower price and it has a higher NAV/share, yet the portfolios for Core 4 and Core 5 are essentially the same. The discount on December 24th for Core 4 was 24.1% and the discount for Core 5 was 32.3%.

   The article probably understates the effect of the Core VCT B shares on the NAV of the Core VCT ordinary shares, if the NAV is or the Ordinary shares is adjusted to take into account the B shares, it works out at 62.5p / ordinary share (not 85.02p/share as published in the last RNS). The calculation used for determining the relative NAV for the Core VCT ordinary shares and the Core VCT B shares is somewhat complicated, but is fully explained in this document on the Core VCT web site:
   http://www.core-cap.com/pdf/Core%20VCT%20III%20-%20Prospectus.pdf

   Taking into account the adjusted NAV of the ordinary shares, the shares were trading at a discount of around 22.5% (based on the mid price) on December 24th.

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   wildrides

   29 December 2014, 02:16

   All sounds like witchcraft and jiggery pokery to me . But anyways I note your vested interest which is a red flag .

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   nigel somerville

   29 December 2014, 03:57

   Tim – I am grateful for your detailed comments. The point here was that I think that the Core VCT ordinaries are attractive because of the discount and the limited downside assuming the distribution of funds from the disposal of Kelway goes as promised. I note a couple of points form the 2014 Interims – firstly that the company intends (subject to VCT rules and working capital requirement) to cough up all proceeds from realisations.

   The point you make about the B shares is important. In the 2014 Interims, we are told that the distributions to ordinary shareholders is approx. 54p short of the hurdle, after which 40% of payable distributions will go to the B shares. So by my maths, if (say) 35p a share is paid out from the Kelway sale there will remain 50p of assets and a remaining hurdle of 19p to pay before the B shares take any proceeds. Of that 50p, then, 19p is directly attributable to the ordinaries, along with 60% of the remaining 31p (c.18p). Thus the ordinaries are sporting a ‘real’ NAV of 35+19+18p = 72p.

   In addition, we have been told that proposals to distribute the Kelway proceeds will come ahead of the next AGM (2 May for the last two years). Given that the hurdle is compounded at 5% a year (calculated daily) that will add another couple of pence to the hurdle by the time any cash is actually paid out. So I would anticipate that by May we will be looking at a ‘real’ NAV of 35p (assumed distribution) + 21p (remaining hurdle) + 17.4p (60% of remainder) = 73.6p. OK, not quite the stated NAV of 85p but that still represents a 44% premium to the offer price at the time of the article.

   But it also means that (assuming a payout of 35p – maybe a bit more) anyone getting in at 51p will have effectively paid 16p for the remaining 38.6p of real NAV.

   I had not really intended to say that Core IV was a buy although on reflection that is not clear, and as you say Core V is a cheaper version of, effectively, the same thing. I was trying to use it to compare Core VCT and thus it was Core VCT which was the buy.

   You are quite correct to pull me up over the B shares, although I’m not sure that the miss is as big as you suggest. But I think the investment case is much the same, provided readers don’t chase the shares.

   Wildrides – yup, and some sleight of hand too! I do think the remuneration package for the manager is way too high, but a bit of homework seems to reveal some decent value on offer – hence the article. Yes, I have a vested interest here, as declared, although I would make the point that if the price were to appreciate substantially it would limit the options of the board to do a share buyback in the market (which, at current prices, would make a useful contribution to the NAV of the remaining shares) so I don’t really see that I’m doing myself any favours. (I think it unlikely that the share price will get close enough to NAV to make a sale worth it for me so I’ll probably hang on to the bitter end, before you beat me up with that one!) So I hope the flag is perhaps a bit more of a pale pink hew….(or, in my case, pale grey – my eyes don’t do red!)

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   Tim J Grattan

   29 December 2014, 17:59

   Thanks Nigel

   Alas, the chairman’s statement in the annual report regarding relative distributions for the Core ordinary shares and the Core B shares is an over simplification and can lead a reader to draw incorrect conclusions regarding the distribution mechanism.

   The distribution mechanism is fully described on p21 of the Core, Core II and Core III merger document published June 2010 (see abstract and link copied below this post)

   Your calculation (above) omits the important second step, which is a catch up period during which time the B shares receive all distributions (an equilisation payment) and the ordinary shares receive no payments. I have to thank Blagdon on the Motley Fool for pointing this out earlier this year, up until then I had been making the same error in my distribution calculations. The discussion with Blagdon on this topic is on the following thread, starting May 3rd (about 1/3 of the way down)
   http://boards.fool.co.uk/rotten-to-the-core-12767986.aspx?sort=whole#12767986

   Taking into account the equalisation payment due to the B shares, I estimate the NAV (end of December 2014) attributable to the ordinary shares at 62.55p/share and the NAV attributable to the B shares at 33.70p/share. If any reader is interested I can send them the spreadsheet detailing the stepwise calculation used to derive these estimated values.

   ——————————————————————————————————————-

   http://www.core-cap.com/pdf/Core%20VCT%20III%20-%20Prospectus.pdf

   The B Share mechanism for the Company will as a result, following the merger, apply as follows;

   * first, the holders of Ordinary Shares will be entitled to all distributions until such time as 60p has been returned per Ordinary Share (of which the Average Weighted Per Share Distribution will be deemed to have been satisfied), plus an amount equal to the Existing Hurdle plus 5 per cent per annum (compounded annually and calculated on a daily basis from the date of issue of the Ordinary Shares) on such part of the Effective Initial Cost that remains to be paid to the holders of Ordinary Shares in excess of 60p share;

   * second, all income and capital shall be distributed or returned (as the case may be) to the holders of B Shares until they have received an amount equal to 66.6667 per cent. of the amount distributed to the holders of Ordinary Shares in excess of 60p share (i.e. an equalisation payment in order to give the holders of B Shares 40 per cent. of all income distributed and capital returned above the Effective Initial Cost); and

   * thereafter the Ordinary Shares and B Shares rank pari passu for all distributions resulting in 60 per cent. being distributed to the holders of Ordinary Shares and 40 per cent. Being distributed to the holders of B Shareholders.

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   dave green

   30 December 2014, 03:07

   Yes I also made the same mistake as Nigel. It seems like you have to go back years and read the actual admission document to find the true dilutive effect of the B shares. I suspect it is not in their best interests to draw attention to the true dilutive effect.

   Unfortunately the statement in the interim report is wrong. Its false and it should be removed immediately. IMO they should be required to re-release the interim statement pointing out the error.

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   nigel somerville

   30 December 2014, 09:09

   All – I have emailed the company: will report back.
   N

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   Dave Green

   16 January 2015, 05:21

   Nigel
   Have you received a reply from the company yet?

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   nigel somerville

   19 January 2015, 03:05

   Update coming Weds this week (21 Jan). I have set a deadline.
   N