www.ambrian.com
Ambrian Capital is An eastern facing natural resource investment bank
If you want to get off on the wrong foot with Tom Gaffney, Chief Executive of Ambrian Capital (AIM: AMBR), talk to him about Ambrian Capital as if the whole company is simply an appendage to its AIM stock broking division - Ambrian Partners - rather than an investment bank. Fortunately we didn't do this, but we quickly realised that there are a number of aspects of Ambrian Capital that its Chief Executive feels are ignored, or misunderstood, by the market.
The history of the use of the Ambrian name reveals the reasons that the company can be misunderstood. Following six years as a director of JP Morgan's Metals and Mining Team - a natural resources investment bank. Tom Gaffney founded Ambrian Partners in 2001, and by 2004 the business had built up a reputation as a nimble investment house and was acquired by Golden Prospect. Golden Prospect was a natural resources investment company founded by another well known name in the natural resources world ? Malcolm Burne. Following the acquisition Golden Prospect was renamed Ambrian Capital and the combined group operated, not only as a natural resources investment company, but also was registered with the London Stock Exchange as a Nominated Advisor and Broker (Ambrian Partners) and the London Metal Exchange as a broker (Ambrian Commodities). Other Ambrian Capital divisions include Ambrian Asset Management, which runs a precious metals fund, and Ambrian Principal Investing, which manages a portfolio of listed and unlisted investments in the natural resources sector.
So the merged business became a natural resources investment bank, providing capital, corporate finance and stockbroking services to the natural resources sector ? with Ambrian Partners continuing to build up business as a corporate broker to mining and oil and gas companies, with forty one capital raisings raising £320 million including fourteen AIM floats to its name, in the first twelve months as part of Ambrian Capital. So Ambrian Partners continued to develop a high profile as a major player in developing AIM's global role in financing and floating and junior natural resource companies.
Meanwhile, as the Ambrian name had been acquired by a natural resources investment company (Golden Prospect), the valuation model used for investment companies has hung on as the driver for the company's share price. In other words Ambrian Capital tends be valued by the market on a discounted net asset valuation basis, despite the fact that the group's whole range of businesses are performing well.
Interim Results for the period ending 30 June 2007, released at the end of September, highlighted dual revenue growth. Ambrian Capital's investment banking arm completed nine capital raisings, with a total value of £68 million, and saw revenues rise 26.5% compared to the corresponding six months of 2006. Growth was also fuelled by Ambrian Commodities' unique position as one of only forty companies licenced to trade on the London Metal Exchange, and also trading in soft commodities and carbon credits. The investment banking business contributed approximately 36% of group revenue in these interims. The remaining revenue was derived from equity investments, which had a strong first half, generating £9.5 million in gains.
Total cash deposits came to a healthy £19.9 million, which at the current market cap represents nearly 30% of the company's valuation. Add in the value of its equity investments, as of June 30th, some £51 million ? and you start to see that Ambrian Capital is trading at a discount to its Net Assets. This sort of discount could be expected if the company was solely an investment company, but with revenues also generated from investment banking ? the fastest growing part of the business ? the valuation should be also be based on a profit to earnings ratio.
House broker, Collins Stewart, have pointed this out in their most recent update, arguing that the group should be valued on a part NAV and part cash flow model to reflect its range of operations - and for the record, Collins Stewart has an 80 pence price target for Ambrian Capital.
However, it looks likely that Ambrian Capital's valuation model is more likely to become increasingly skewed towards a cash flow basis (investment bank) rather than a NAV (investment trust) basis. Tom Gaffney and Malcolm Burne divested 9.1% of Ambrian Capital to Hong Kong financial services group Sun Hung Kai & Co (SHK). Sun Hung Kai (HKEx:0086) is one of Hong Kong's largest brokerage and financial services companies, currently capitalised at over HK$20 billion, with shareholders' funds at currently more than HK$9 billion. SHK employs over 1,300 people and has over fifty branches in Hong Kong, Macau and China.
Ambrian Capital and SHK plan to use Ambrian Commodities membership of the London Metal exchange to offer SHK's clients in Asia access to commodities trading. Ambrian Capital also sees possibilities in the future to leverage SHK contacts and experience in Asia to source new companies to bring to the London market for financing. Ambrian Capital may also work with London listed companies that are considering a listing in Hong Kong.
In 2006 Ambrian Asset Management launched its first fund, the Golden Prospect Precious Metals fund, which is a closed ended fund registered in Guernsey and listed on AIM (Code: GPM). Ambrian Asset Management transferred the bulk of its portfolio of precious metals investments, valued at approximately £9.4 million into GPM in return for GPM shares. Meanwhile Ambrian Principal Investing still holds some of its larger investments directly, including an approximate 3% interest in Jubilee Platinum (AIM: JLP) and a 39.8% interest in Minerva Resources (AIM: MVA) plus stakes in a number of companies that are yet to list on any market.
Times are changing, and it is clear that Tom sees the future of Ambrian Capital as a kind of boutique investment banking group offering market making, brokerage, and advisory services to PLC's. Ambrian Capital will also be involved in mergers and acquisitions work, commodities trading through the LME, and applying its fundraising skills to: minerals, oil & gas, soft commodities, and emerging technologies in the alternative energy and green sector. Ambrian Capital intends to fund this growth through its healthy balance sheet and by divesting itself of further equity stakes when appropriate.
Ambrian, in various guises, has been an early mover in supporting the current commodities super cycle, and has worked hard to develop its expertise and facilities and positioned itself to capitalise on the ongoing cycle including, exposure to China and Asia. Ambrian Capital's share price approached £1.00 at just the wrong moment - last July. Shares often get weak knees as they approach a big round number for the first time, and in Ambrian Capital's case, this seems to have been overdone and the shares are likely to enjoy a positive re-rating - especially if the market cops on to the growth and profitability of the investment banking aspect of the business. The shares lost nearly a third of their value before finding support, leaving the company with a market cap of around £64 million.
Links
Golden Prospect Precious Metals
Sun Hung Kai & Co.
Jubilee Platinum
http://www.jubileeplatinum.com
Minerva Resources
