HawkEye 360 piercing the clouds

Allied Minds 6 August 2019 Update
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Allied Minds

HawkEye 360 piercing the clouds

Investee funding round

Investment companies

6 August 2019

Price

61p

Market cap

£147m

US$1.22/£

Parent cash ($m) at 31 December 2018

50.6

Shares in issue

241.3m

Free float

91%

Code

ALM

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.0)

(1.5)

(23.4)

Rel (local)

(10.2)

(1.7)

(21.1)

52-week high/low

87p

37p

Business description

Allied Minds is an IP commercialisation company with a concentrated investment portfolio focused on early-stage companies within life sciences and technology. Its portfolio companies are spin-outs from US federal government laboratories and universities.

Next events

Interim results

19 September 2019

Analysts

Richard Williamson

+44 (0)20 3077 5700

Victoria Pease

+44 (0)20 3077 5700

Allied Minds is a research client of Edison Investment Research Limited

HawkEye 360, one of Allied Minds’ principal portfolio companies, has announced a Series B funding round with new investors, Airbus and Esri, investing alongside Allied Minds and existing investors. The round was struck at a pre-money valuation of $200m (c 122% uplift in headline value), raising $70m of capital in two equal tranches, the second with certain conditions precedent. After Allied Minds’ recent portfolio downgrades, this highlights the material embedded value in its remaining investments. By our calculation, the round represents a $27–44m uplift in fair value for Allied Minds, or 9–15p per share. The shares now trade at a 41% discount to our adjusted estimate of FY18 NAV of a minimum of 103.5p.

Period end

Ownership adjusted value (OAV) (US$m)

Parent-level net cash (US$m)

NAV
(US$m)

NAV/share
(p)

P/NAV
(x)

12/16

415.8

136.7

552.9

208.0

0.29

12/17

395.6

84.2

479.8

150.0

0.41

06/18

350.1

66.0

416.1

132.4

0.46

12/18*

226.7

50.6

277.3

94.2

0.65

Note: NAV is calculated as fair value plus net cash at the parent level. *FY18 NAV is based on our estimate of FY18 fair value as this is no longer disclosed by the company.

HawkEye 360 Series B funding round

Allied Minds today confirmed that one of its principal portfolio companies, HawkEye 360, has announced a Series B funding round with major strategic investors, Airbus Industries and Esri (an international supplier of mapping software), investing alongside Allied Minds and existing investors, Razor’s Edge Ventures and Shield Capital Partners. The round was struck at a pre-money valuation of $200m, raising $70m of capital in two equal tranches. Allied Minds invested $5m in the initial tranche, with the second tranche subject to conditions including approval by the Committee on Foreign Investments in the United States.

Use of proceeds

HawkEye 360 has already launched and deployed its first satellite cluster (now operational) and the previous A-3 funding round allowed it to fabricate and launch a second cluster. As well as cementing a partnership with Airbus (providing exceptional access to distribution in European markets) and Esri, this latest round supports fabrication and launch of a further four satellite clusters, forming a fully operational constellation of 18 satellites with rapid global revisit.

Valuation: Material 41% discount to a rising NAV

Despite Allied Minds’ limited cash resources (FY18: $50.6m), management’s stated intention has been to ensure it retains the strategic flexibility to participate in major funding rounds like this to maximise shareholder value in the medium term. This funding round goes some way to validate that strategy. By our calculation, the round represents a $27–44m uplift in fair value for Allied Minds, or 9–15p per share. The company’s shares now trade at a 41% discount to our adjusted estimate of FY18 NAV of a minimum of 103.5p.

April 2019 strategic review

Following the portfolio rationalisation over 2017/18 to focus the business on its principal portfolio companies, together with the cash management measures announced in February 2019, management enacted further measures in April 2019 to deliver value creation:

Focus remaining cash resources on key assets in the current portfolio.

New investment on indefinite hold.

Further cuts to central costs (to reduce opex to $5–6m pa).

Together, these measures are intended to give Allied Minds the best opportunity to deliver on the promise of its investment model, without further recourse to the financial markets, to maximise shareholder returns over the medium term.

Looking ahead to commercialisation

As we reiterated in our previous note, CEO steps down, Allied Minds has set out clear milestones in 2019 for its three most promising assets (HawkEye 360 – multiple product launches, funding, Federated Wireless – FCC approval, funding and Spin Memory – foundry contracts).

With the funding round for HawkEye 360 now successfully announced, we are hopeful that 2019 will start to deliver a reversal in sentiment.

Background on HawkEye 360

HawkEye 360 is a Radio Frequency (RF) data analytics company. It operates a first-of-its-kind commercial satellite constellation to identify, process and geolocate a broad set of RF signals. It extracts value from these data through proprietary algorithms, creating analytical products for global customers. Products include maritime domain awareness and spectrum mapping and monitoring; customers include a wide range of commercial, government and international entities. A more detailed review of its business can be found in our initiation note, Portfolio rebased for growth.

Exhibit 1: Hawkeye 360 – 2019 key operational management objectives

Successfully launch core analytic products in the Spectrum Awareness product line, RFGeo, RF Survey and Emitter Data Base.

Complete development of next cluster and ready for launch.

Commence development of follow-on clusters two, three and four, for launch in 2020.

Source: Allied Minds

27 June 2019: Robert Cardillo has joined advisory board. Cardillo is the former director of the National Geospatial-Intelligence Agency (NGA), and a highly experienced national security professional and geospatial expert. Prior to the NGA, he served as the first deputy director for intelligence integration at the Office of the Director of National Intelligence, where he was responsible for delivering the President’s Daily Brief, and overseeing the National Intelligence Council and the National Intelligence Managers.

22 May 2019: HawkEye 360 and Windward partner to provide deeper insights and better visibility on vessel behaviour. Combining unique RF analytics with a powerful maritime platform promises significant improvements for global maritime domain awareness. ‘HawkEye 360 and Windward, a world leader in maritime risk analytics, have partnered to offer new global insights into maritime domain awareness through their combined capabilities. HawkEye 360 will contribute its unique RF dataset for use on Windward’s digital platform with select customers.’ (source: www.he360.com)

7 May 2019: Chris Herndon joins HawkEye 360 as CIO. Former director of White House Information Technology brings extensive cybersecurity and policy expertise. ‘HawkEye 360 today announced that Chris Herndon has joined the company as CIO. Herndon brings more than 30 years of experience in building advanced information technology systems. Most recently, Herndon served in the Trump Administration as the White House deputy assistant to the president and the director of White House Information Technology, where he created the White House IT strategic plan and transformed enterprise services across all 12 components of the Executive Office of the president.’ (source: www.he360.com)

4 April 2019: HawkEye 360 launches first commercial product – RFGeo. RF signal mapping reveals new patterns of life. ‘HawkEye 360 announced that it has launched RFGeo, a first-of-its-kind RF signal mapping product. RFGeo uses the unique data generated by the HawkEye Constellation of space-based RF sensing satellites to identify and geolocate RF signals, providing a new global geospatial data layer. RFGeo is the company’s first commercially available product.’ (source: www.he360.com)

Valuation: Material 41% discount to a rising NAV

By our calculation, the HawkEye 360 funding round represents a $27–44m uplift in fair value for Allied Minds (9–15p per share), depending on the dilution of Allied Minds’ stake. The shares now trade at a 41% discount to our adjusted estimate of FY18 NAV of a minimum of 103.5p.

Exhibit 2: Fair value impact of HawkEye 360 funding round

Net value at 31/12/18 (US$m)

Net cash invested (US$m)

Fair value change (US$m)

Net value as at 6/8/19 (US$m)

% held at 6/8/19

Uplift in NAV/share (p)

Allied Mind stake - undiluted

43.4

5.0

44.2

92.6

34.3%

15.0

Allied Mind stake - fully-diluted

75.7

28.0%

9.3

Source: Allied Minds, Edison Investment Research. Note: Expected ownership by ALM after completion of second tranche of funding.

As we have noted previously, given its narrowed portfolio, Allied Minds now looks less like its IP commercialisation peers as it offers look-through to only a small number of emerging technology businesses.

Allied Minds’ shares trade at a 41% discount to our adjusted estimate of FY18 NAV of a minimum of 103.5p (Exhibit 3).

Exhibit 3: Peer group comparison

 

Price

Currency

Market
cap (m)

NAV (m) (last reported)

Cash/
(debt) (m)

NAV premium/ discount

NAV per share (p)

Allied Minds

61.0

GBP

147.2

227

41

0.65

94

Adjusted for HawkEye 360 funding round

250

0.59

103

Arix Bioscience

124.5

GBP

168.8

270

91

0.63

200

IP Group

61.7

GBP

653.5

1218

219

0.54

115

Malin Corporation

3.30

150.7

392

(12)

0.38

8.57

Mercia Asset Management

34.4

GBP

104.3

125

38

0.83

41

HgCapital

206

GBP

829.4

802

97

0.96

215

Oakley Capital

234

GBP

479.2

645

212

0.74

316

Draper Esprit

478

GBP

563.7

619

100

0.91

524

Augmentum FinTech

111.5

GBP

130.5

103

26

1.27

110

Source: Refinitiv data; Edison Investment Research. Note: Priced at 5 August 2019.


Exhibit 4: Financial summary

$'000s

2014

2015

2016

2017

2018

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

7,715

3,300

2,664

5,001

5,561

Cost of Sales

(5,416)

(3,925)

(5,563)

(5,242)

(2,827)

Gross Profit

2,299

(625)

(2,899)

(241)

2,734

Normalised operating profit

 

 

(47,510)

(89,372)

(103,925)

(94,542)

(83,583)

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

(1,479)

(309)

(1,365)

(2,363)

(545)

Share-based payments

(8,939)

(7,041)

(8,385)

(7,562)

(7,413)

Reported operating profit

(57,928)

(96,722)

(113,675)

(104,467)

(91,541)

Net Interest

222

670

2,318

305

1,313

Joint ventures & associates (post tax)

0

0

0

0

(1,301)

Fair value changes

0

(1,937)

(17,585)

(6,953)

138,841

Profit Before Tax (norm)

 

 

(47,288)

(90,639)

(119,192)

(101,190)

55,270

Profit Before Tax (reported)

 

 

(57,706)

(97,989)

(128,942)

(111,115)

47,312

Reported tax

0

0

0

0

0

Profit After Tax (norm)

(47,288)

(90,639)

(119,192)

(101,190)

55,270

Profit After Tax (reported)

(57,706)

(97,989)

(128,942)

(111,115)

47,312

Minority interests

12,228

20,192

32,609

35,337

(7,990)

Discontinued operations

0

0

0

0

0

Net income (normalised)

(35,060)

(70,447)

(86,583)

(65,853)

47,280

Net income (reported)

(45,478)

(77,797)

(96,333)

(75,778)

39,322

Basic average number of shares outstanding (m)

186

215

217

236

241

EPS - basic normalised ($)

 

 

(0.19)

(0.33)

(0.40)

(0.28)

0.20

EPS - diluted normalised ($)

 

 

(0.19)

(0.33)

(0.40)

(0.28)

0.20

EPS - basic reported ($)

 

 

(0.24)

(0.36)

(0.44)

(0.32)

0.16

Dividend ($)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

n/a

(57.2)

(19.3)

87.7

11.2

Gross Margin (%)

29.8

N/A

N/A

N/A

49.2

Normalised Operating Margin

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

44,039

92,784

38,232

28,369

86,096

Intangible Assets

3,409

4,384

2,762

1,074

1,221

Tangible Assets

16,330

34,173

31,882

26,627

5,997

Investments & other

24,300

54,227

3,588

668

78,878

Current Assets

 

 

248,991

158,427

232,007

184,792

107,034

Stocks

2,919

1,511

2,551

0

0

Debtors

6,305

7,342

5,900

15,642

6,400

Cash & cash equivalents

224,075

105,555

209,151

158,075

100,234

Cash at parent*

 

 

N/A

N/A

136,700

84,200

50,600

Other

15,692

44,019

14,405

11,075

400

Current Liabilities

 

 

(62,480)

(108,974)

(155,402)

(200,202)

(69,557)

Creditors

(11,339)

(14,268)

(13,941)

(14,276)

(13,030)

Tax and social security

(947)

(395)

(458)

(4,296)

(2,333)

Short term borrowings

(213)

(228)

(115)

0

0

Subsidiary preferred shares

(49,981)

(94,083)

(140,888)

(181,630)

(54,194)

Long Term Liabilities

 

 

(717)

(863)

(720)

(867)

(436)

Long term borrowings

(338)

(112)

0

0

0

Other long-term liabilities

(379)

(751)

(720)

(867)

(436)

Net Assets

 

 

229,833

141,374

114,117

12,092

123,137

Minority interests

4,946

10,631

20,797

59,241

4,490

Shareholders' equity

 

 

234,779

152,005

134,914

71,333

127,627

CASH FLOW

Op Cash Flow before WC and tax

(44,618)

(85,286)

(97,290)

(88,440)

(77,525)

Working capital

(981)

2,652

468

(2,477)

6,033

Exceptional & other

0

0

0

0

(283)

Tax

0

0

0

0

0

Net operating cash flow

 

 

(45,599)

(82,634)

(96,822)

(90,917)

(71,775)

Capex

(1,764)

(23,213)

(4,087)

(1,522)

(9,110)

Acquisitions/disposals

(38,967)

(51,786)

74,816

5,853

(18,884)

Net interest

222

716

1,602

138

896

Equity financing

154,408

2,443

79,319

1,595

1,594

Dividends

0

0

0

0

0

Other

54,473

36,165

48,993

33,892

39,438

Net Cash Flow

122,773

(118,309)

103,821

(50,961)

(57,841)

Opening net debt/(cash)

 

 

NA

(223,524)

(105,215)

(209,036)

(158,075)

FX

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

Closing net debt/(cash)

 

 

(223,524)

(105,215)

(209,036)

(158,075)

(100,234)

Source: Company accounts, Edison Investment Research. Note: *For clarity, cash at parent has been broken out as a separate line from cash & cash equivalents. As a line item, it does not form part of the calculation for current assets.

General disclaimer and copyright

This report has been commissioned by Allied Minds and prepared and issued by Edison, in consideration of a fee payable by Allied Minds. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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General disclaimer and copyright

This report has been commissioned by Allied Minds and prepared and issued by Edison, in consideration of a fee payable by Allied Minds. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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