This is the first post of the AIM IT Project I announced last time. I’m starting off by reviewing Clear Leisure (AIM:CLP), I don’t intend to do an entire post for every Investment Trust in the list, but when one tops the list trading at apparently only 10% of Net Asset Value I can’t help but kick off the series with it.

This isn’t your typical Investment Trust which holds a portfolio of equities, it has a few concentrated majority stakes in a number of leisure businesses, which is why I feel it needs a whole post to explain it.

The business

Clear Leisure’s core assets, where the Company owns a majority controlling stake, include a leading Italian hotel management company (Ora Hotels), Italy’s largest sushi restaurant chain (Sosushi), Italy’s most successful water theme park (Ondaland), and a 670,000 sq m (165 acres) tract of real estate, which has been approved for the development of a major theme park, hotel, shopping complex and commercial activities (Mediapolis).

Over the years the company has changed its investment strategy and constantly issued shares, mostly to the detriment of existing shareholders.

Year Shares Outstanding (adjusted for consolidation) 2005 772 2006 1,323 2007 1,323 2008 1,323 2009 1,351 2010 9,560 2011 27,968 2012 92,327

In 2010 CLP was known as ‘Brainspark’ (no wonder they changed the name!) and it had Net Asset Value per share (NAV) of 101.5p which fell to 29.6p in 2011. It was at this time that the company changed strategy from having minority stakes in companies to having fewer, but larger stakes in the leisure industry in the Meditarrenean. By 2011 it held all the investments listed above. It has since increased its stake in some companies and looked to sell its stake in Mediapolis (this was hoped to be completed by 2012 but still hasn’t).

Over 2012 it made several new issues of shares to increase its stakes at prices per share ranging from 10p to 16p (current share price is 2p).

The Chairman of the company at the time was Alfredo Villa, and he held 13.2% of the company. His background is in options trading, where he was a technical analyst (strike 1!). Other members of the board, including the CEO are also members of the boards of the companies they invest in (strike 2!). In my opinion this gives them a conflict of interest, to continually inject capital into poor businesses.

Later in 2012 the share issues continued in exchange for stakes in the businesses, with the price of new issues falling to 5p a share. This wasn’t consistent though, with new shares changing hands at all sorts of different prices.

Then a new face emerged, Luke Johnson bought a £1m stake in the company and became chairman. He is a prolific manager of big UK chains such as Giraffe restaurants. He made some good changes to the group, but that couldn’t prevent the NAV per share in 2013 falling from 29.6p to 13.3p.

Its main holdings are not thoroughly segmented in the annual reports, but this is what I have gathered on the financial condition of each. More details of the operations of these companies can be found in this research report.

Ora Hotels (ORH)

CLP owns 73% of ORH. Its stake was recently increased as a result of the sale of a hotel development in Mozambique to Mr Presti, a director and shareholder of ORH, in return for shares representing approximately 16% of ORH. ORH has subsequently cancelled the shares received as consideration. Following the transaction, Mr Presti no longer has a shareholding in ORH and has left the board of ORH. I don’t really know what to think of the transaction.

This RNS release gives some details of ORH, the 16% stake was traded for a hotel in development which had €650k spent on it. If that is used as a yardstick it would value ORH at €4m. I think that’s likely to be a maximum value given an insider would not voluntarily short change themself, most likely the opposite.

In 2012 it recorded revenues of €46.7m (2011: €37.9m), EBITDA of €1.52m (2011: €0.23m) and a consolidated profit of €0.69m (2011: loss of €0.15m).

But the plot thickens, recently CLP has taken legal action against ORH because it financial irregularities and is trying to reclaim all the money it has invested in it. This RNS release states that the CLP shares ORH holds (which were used by CLP to acquire the stake) will be transferred back to CLP. That means the free float of share will be reduced by 14.4m, or 7.3%.

Hence this stake is worthless, but the outstanding shares can be reduced by this amount.

Sosushi

Italy’s main Sushi chain has many similarities to the chain Yo Sushi.

Its latest results available show it earned €52k on €1.7m of revenues. This was an increase from a loss of €500k on €1.0m in revenues from 2011. Such impressive growth usually attracts high premiums, but I like to be more conservative. A multiple of 15x earnings seems appropriate to me, that values it at £1.2m.

Sipiem

CLP owns 50% of Sipiem. Financials on this company are hard to find. In the year ending 31 December 2011, Sipiem reported revenue of €2.2m and net profit of €0.1m which is the latest information I could find. But other investors did put €7m into the company in 2012. So I don’t think it’s worthless but neither do I want to put a significant valuation on a company that makes little profits. I will value CLPs portion at £1m which I think has an adequate margin of safety given it recently had €7m of cash on the balance sheet as well as an operating business. CLP also recently increased its holding at a price that valued the company at around €8m.

Mediapolis

CLP has been trying to sell this development project for years, they own a 69.5% stake in it. Deals have fallen through due to lack of mortgage financing, as well as deals rejected because the board wants payment in cash and not shares.

CLP has made a proposal to restructure Mediapolis debt and this has recently been well received by the courts so looks promising. This announcement values the company at €23.6m.

But they have also had two cash offers for the company (finally!) for €20m (£16.5m). I don’t think it’s unfair to take this as the value given the two offers, so CLP’s stake is worth £11.5m.

Other companies

CLP also has holdings in other companies. Some it only has minority stakes and wishes to hold, others are up for sale but have been for years. I am not going to attach any value to these other holdings as they are small and even more difficult than the rest to value.

Conclusion

[Editors note: I have since realised an error in the valuation – this post should be read for more info]

Adjusted Market Cap: £3.66m

Reported Net Asset Value: £25.27m

CAGR (NAV per share): -49% p.a.

Valuation: £13.0m

Upside: 255%

The sale of the Mediapolis investment should act as a catalyst for investors realising the hidden value in these shares. The board has stated they intend to reinvest the proceeds into new acquisitions which isn’t particularly pleasing to my ears, but is to be expected of an Investment Company.

But this company isn’t without its risks, the biggest of which to me is that the company needs to continually issue new shares in order to stay solvent as its assets are not cash generating. Because of this requirement they have had to continually issue shares at a discount and that is why long term shareholders have seen shareholder value destroyed. If the Mediapolis sale does not go ahead it is likely another diluting share issue will take place.

Despite this, and the atrocious performance of this fund in the past, I still think it is deeply undervalued, so I will take a position, but I wont make it a large one. I also won’t be holding on until full value is realised. I will look to exit the position when (if) the market cap hits £11.5m (5.82p per share, the value of the Mediapolis deal).

Disclosure: I intend to initiate a long position in CLP

WARNING: Shares in AIM, especially penny shares are very volatile and unpredictable. Regulation is also more relaxed than the main stock market. For example CLP shares were suspended when it failed to file accounts in a timely manner last year. This company could also go bankrupt due to the cash flow issues and investors could lose their entire position.