Chrysalis puts a pin in share buybacks as discount slumps to 55%

Co-managers Williamson and Watts to redouble their efforts on existing holdings, 60% which have yet to break even

Chrysalis Watts and Williamson

Chrysalis has shelved the idea of a share buyback for now, despite slumping to a 55% discount, as it battens down the hatches to help its unprofitable holdings stay afloat.

In stark contrast to its last set of interim results, the £1.3bn trust saw net asset value plunge 16% from 251.96p in September last year to 211.76p by the end of March.

Over the six-month period, its share price tanked 34% to 177p. This has fallen further still to 99p, a low last seen during the Covid sell-off in March 2020, which has left the trust limping on a 54.6% discount, according to stats from the Association of Investment Companies.

While other late-stage growth investment trusts, such as Scottish Mortgage, have narrowed their discounts by issuing share buybacks, Chrysalis has said this is not something it is considering presently.

“At the current time, we believe undertaking a buyback of a sufficient quantum to be meaningful, over a sufficient time period to prove effective, and with sufficient reserve ‘dry powder’ to be credible, would put at risk our ability to fund our companies, which could prove highly damaging to the company’s long-term prospects,” the investment adviser’s report read.

60% of the portfolio unprofitable

Chrysalis said it had £55m of cash on the balance sheet as of 27 June 2022, which was “sufficient” to cover its existing investments but not enough to initiate new portfolio holdings or retire a significant quantum of shares.

Around 60% of the companies in the portfolio have yet to turn a profit. This includes Swedish buy-now-pay later firm Klarna, which accounts for 19.1% of the portfolio, and German digital insurer Wefox, which makes up another 11.2%. It largest holding, Starling Bank (21%), has been profitable since October 2020.

Co-managers Nick Williamson (pictured right) and Richard Watts (pictured left) said they have been working with these companies on their operating expenses and budgets, and ensuring they have the funding they need.

The average cash runway for the trust’s unprofitable businesses is 14 months and Williamson and Watts said their cash position means this can be extended “by at least a year should current conditions persist”. The listed portion of the portfolio, which includes THG and Wise, can also be used to shore up liquidity, they added.

“Material falls in listed valuations typically create headwinds for our near-term NAV progression, but in our experience, shakeouts of this type also provide opportunities for the best companies to exploit in the medium term.

“While we recognise the current discount to NAV Chrysalis trades on, our current stance is that we should reserve sufficient capital to support the existing portfolio while this market dislocation remains. If, and when, market conditions allow, or Chrysalis generates capital, share buybacks or new investments might be considered.”

GS Non-Profitable Tech performance suggests further hit to NAV

Beyond publishing the interim NAV, the update provided no clues on how portfolio valuations have held up in the months since the end of March.

Chrysalis is in the process of swapping to an independent valuation committee, chaired by KPMG veteran Lord Rockley, in preparation for its move to becoming a self-managed trust on 21 July.

The interim report references the Goldman Sachs Non-Profitable Tech Index, which comprises 60 US-listed stocks that are still loss-making, which fell by 35% over its interim period.

“Looking at this index as of 31 March 2022 and freezing the index weights, it is apparent that forecasts for revenue growth for 2022 have actually risen over the six-month period, meaning that valuation has been the driver of this index performance.

“We estimate this performance has led to a contraction in the 2022 EV/sales metric, based on the 31 March 2022 index weights, from approximately eight times to less than six times.”

Post-period end, however, the GS index has fallen another 38%, meaning it is now 60% lower than 30 September 2021.

Klarna is rumoured to be raising capital at a discount, a move which will see it take a 67% haircut, though Chrysalis said the company is “moving toward profitability”.

By contrast, Wefox is also rumoured to be raising capital at a premium to the trust’s current holding value.

See also: Are Scottish Mortgage’s unquoted valuations ‘detached from reality’?

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