Is this the turning point?

Allied Minds 1 October 2019 Update
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Allied Minds

Is this the turning point?

Interim results

Investment companies

1 October 2019

Price

52.6p

Market cap

£127m

US$1.23/£

Parent cash ($m) at 30 June 2019

46.6

Shares in issue

241.3m

Free float

91%

Code

ALM

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.4)

(28.0)

(27.4)

Rel (local)

(12.8)

(28.0)

(26.2)

52-week high/low

84.2p

37.3p

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

Trading statement

February 2020

Full year results

April 2020

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Allied Minds is a research client of Edison Investment Research Limited

H119 has been a period of real progress for Allied Minds, with strategic funding rounds for Federated Wireless and HawkEye 360 and the $65.6m sale of Allied Minds’ stake in HawkEye 360 to Advance. With the transaction subject to shareholder approval, 50% of the sale proceeds ($32.8m, c 11p/share) are expected to be returned to shareholders in Q419. Management expects HQ operational costs to reduce to c $7.5m for FY20. It has also taken the opportunity to rationalise the investment portfolio, with the remaining assets showing good progress. Parent cash at 30 June 2019 was $46.6m ($31.3m adjusted for post period-end investments). With NAV no longer disclosed by the company, our latest assessment, adjusted for post period-end investments, is 100.2p/share (87.5p/share fully-diluted).

Period end

Portfolio fair value (US$m)

Parent-level net cash (US$m)

NAV
(US$m)

NAV/share
(p)

P/NAV
(x)

12/17

395.6

84.2

479.8

150.0

0.35

06/18

350.1

66.0

416.1

132.4

0.40

12/18*

226.7

50.6

277.3

93.4

0.56

06/19**

266.1

31.3

297.3

100.2

0.53

Note: NAV is calculated as fair value plus net cash at the parent level. *FY18/H119 NAV is based on our estimate of fair value as this is no longer disclosed by the company.
**H119 net cash and NAV are adjusted for post period-end investments.

Interim results

Revenue decreased by $0.6m, to $1.5m for H119 (H118: $2.1m), primarily due to deconsolidation of two of the company’s subsidiaries, SciFluor and Precision Biopsy. Cost of revenue for H119 fell to ($0.6m), as did net finance income to $5.5m (H118: $49.4m), primarily reflecting the deconsolidation. Other income increased to $24.7m (2018: zero), with a $33.9m gain on investments offset by losses from deconsolidated entities. Total comprehensive income for the year fell to $2.3m for H119 (H118: $4.1m). Net cash and investments at 30 June 2019 stood at $56.8m (FY18: $97.7m), of which $46.6m was at parent level (FY18: $50.6m).

Portfolio update

Other than the funding rounds at HawkEye 360 and Federated Wireless, the remaining technology portfolio companies continue to report technical and commercial progress. However, Allied Minds took the decision to cease operations at Precision Biopsy and sold its stake in QuayChain for an undisclosed amount. With no material newsflow from SciFluor following its Q4 bridge round, we have prudently ascribed zero value to SciFluor (FY18: $2m) pending further news.

Valuation: 47% discount to firm-looking NAV

Allied Minds has delivered additional validation for two of its three principal portfolio companies since its strategic review in April and will effect a material return of capital to shareholders (with the transaction subject to shareholder approval). With this validation of its assets, together with a focus on preserving cash and delivery of material cash exits, we believe this provides a solid NAV on which Allied Minds should build over time, with our adjusted NAV per share of 100.2p (or 87.5p on a fully-diluted basis).

Interim results summary

During H119, revenue decreased to $1.5m in H119 (H118: $2.1m), primarily due to deconsolidation of two of the company’s subsidiaries, SciFluor and Precision Biopsy. Net finance income fell to $5.5m (H118: $49.4m), largely as a result of the deconsolidation. Other income increased to $24.7m (2018: zero), reflecting a $33.9m in gain on investments held at fair value, offset by losses from the deconsolidated entities. Total comprehensive income for the year decreased to $2.3m for H119 (H118: $4.1m).

Non-current assets rose to $117.0m at 30 June 2019 (FY18: $83.7m), mainly due to a $36.4m portfolio company fair value increase. Current assets decreased to $63.1m (FY18: $107.0m), reflecting a fall in cash and cash equivalents to $40.9m.

The group’s net cash outflow from operating activities of $26.3m in H119 (H118: $39.7m) reflected the $27.7m net operating losses for the period (H118: $45.1m), together with an increase in working capital and other finance costs of $8.2m (H118: $3.5m).

The group had a net cash outflow from investing activities of $5.0m in H119 (H118: -$2.0m), predominantly related to purchases of property and equipment and intangibles of $2.5m (H118: $1.6m) and a $2.5m investment in Spin Memory in April 2019. Net cash outflow from financing activities of $12.0m in H119 (H118: $11.9m) partly reflects $12.0m cash distributions to shareholders from the dissolution of Signature Medical and the remaining ABLS companies in the first half of 2019.

Net cash and investments at 30 June 2019 stood at $56.8m (FY18: $97.7m), of which $46.6m is held at parent level (FY18: $50.6m).

Outlook: Further progress expected across portfolio

Allied Minds has now largely delivered on the key terms of the April strategic review, intended to give it the best opportunity to maximise shareholder returns over the medium term, without further recourse to the financial markets:

focus remaining cash resources on key assets in the current portfolio;

new investment on indefinite hold; and

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

The company has made good progress in terms of cost reduction, with a number of measures taken, including a reduction in headcount to eight staff and subletting its HQ office space, both by 1 November 2019. However, it has also revised its estimate of ongoing annualised HQ operating expenses to c $7.5m in FY20, driven primarily by a substantial increase in the cost of director and officer insurance. Of the estimated $7.5m in central costs for FY20, $2.9m represents public company costs.

With adjusted net cash of $31.3m at 30 June 2019 (adjusted for $15.3m of investments), together with cash of $32.8m from the sale of its stake in HawkEye 360, management expects to have sufficient cash to allow it to continue to invest in existing assets and maximise the value of its portfolio to shareholders over the medium term, which we understand to mean potentially a three- to four-year time horizon.

In terms of its three principal assets (ex HawkEye 360), Allied Minds also reiterated the key operational objectives for each over the course of 2019:

Exhibit 1 Federated Wireless – 2019 key operational management objectives

ICD approval, followed by FCC certification – complete

Complete build-out of nationally available environmental sensing capability (ESC) network to meet customer requirements – complete

Build infrastructure and capacity to support scale of the business – ongoing

Source: Allied Minds

Exhibit 2: BridgeComm 2019 – key operational management objectives

Successfully demonstrate One-To-Many (OTM) optical communications technology – complete

Develop strategic partnership programme with commercial technology partners to extend the OWC technology offerings – ongoing

Expand the capacity of the global ground network through industry partnerships and ground station installations – ongoing

Continue developing intellectual property around BridgeComm specific technology – ongoing

Continue the strategic relationship with The Boeing Company on both commercial and US Government programmes – ongoing

Build strong commercial and government customer backlog – ongoing

Source: Allied Minds

Exhibit 3: Spin Memory – 2019 key operational management objectives

Create proof of concepts in silicon that demonstrate the superior performance of Spin Memory’s technologies – ongoing

Leverage exclusive licensing agreements with Applied Materials and ARM to bring technology IPs into the mainstream – ongoing

Build strong commercial and government customer backlog for new use cases in AI, ADAS, 5G, IoT and more – ongoing

Source: Allied Minds

Portfolio: Condensed, with solid underpinnings

Third-party investors subscribed for $110.3m of portfolio company equity in H119, including $105.8m post period-end, while Allied Minds invested $24.3m, including $15.3m post period-end.

Allied Minds’ portfolio has now been reduced to eight assets (including HawkEye 360 and SciFluor), with four principal assets (HawkEye 360, Federated Wireless, BridgeComm and Spin Memory). We have already highlighted the progress at HawkEye 360 and Federated Wireless. However, although less newsworthy, we understand that the remaining technology portfolio companies also continue to make good technical and commercial progress.

During the period, management took the decision to cease operations at Precision Biopsy and sold its stake in QuayChain for an undisclosed amount. With no material newsflow from SciFluor following its Q4 bridge round (ALM, Woodford), we have prudently ascribed zero value to SciFluor (FY18: $2m), pending further positive news.

We believe that the write-downs in value of Precision Biopsy, QuayChain and SciFluor provide a solid NAV on which Allied Minds should build over time, with our adjusted NAV per share of 100.2p (or 87.5p on a fully-diluted basis).

Exhibit 4: Allied Minds’ portfolio – with Edison assumptions on fair value

Company

Business description

Date of latest funding round

Edison adjusted value at 31/12/18 (US$m)

Edison adjusted value at 26/9/19 (US$m)

Edison adjusted value at 26/9/19 (US$m)

ALM holding 24/9/19

ALM holding
24/9/19

Basis of estimate of Edison fair value assessment

Undiluted

Undiluted

Fully-diluted

Un-diluted

Fully-diluted

Federated Wireless

Cloud-based SaaS business

Sep 19

63.5

85.7

72.1

43%

36%

Valuation of last round (strategics)

HawkEye 360

RF data analytics company

Aug 19

43.4

65.6

65.6

41%

32%

Cash offer (shareholder approval)

Spin Memory

MRAM Semiconductor memory

Apr 19

73.4

73.4

57.8

43%

34%

Valuation of last round (strategics)

BridgeComm (BridgeSat)

Optical communications service provider

Sep 18

30.9

30.9

23.9

81%

63%

Valuation of last round (strategics)

TableUp

Restaurant supply chain software provider

Apr 18

4.3

4.3

3.6

36%

30%

Valuation of last round

Orbital Sidekick

Space-based hyperspectral imaging/analytics

Apr 18

3.9

3.9

3.5

33%

30%

Valuation of last round (3rd party)

Spark Insights

Property insurance analytics

Apr 19

2.3

2.3

1.9

71%

60%

Valuation of last round

Other investments

Precision Biopsy

Medical device and analytics company

Nov 19

2.5

0.0

0.0

65%

55%

Written off by ALM

SciFluor

Developer of a topical eye droplet treatment

Nov 19

2.0

0.0

0.0

70%

60%

Written down to zero by Edison

QuayChain

CBRS-enabled Smart Industrial Hubs

Sep 18

0.6

0.0

0.0

72%

65%

Sold for undisclosed amount

Fair value (calculated by Edison)

221.7

266.1

228.4

 

 

 

Net cash held at the parent company

50.6

46.6

46.6

Investments (post period end)

(15.3)

(15.3)

Edison adjusted NAV ($m)

272.3

297.3

259.7

Edison adjusted NAV (pence per share)

100.2

87.5

Latest share price (30 Sept 2019)

52.6

52.6

Implied discount to Edison adjusted NAV

47%

40%

Source: Allied Minds data, Edison Investment Research

Valuation: 47% discount to firm-looking NAV

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

Allied Minds’ shares currently trade at a 47% discount to our adjusted estimate of H119 NAV of 100.2p (Exhibit 4), or a 40% discount on a fully-diluted basis.

Exhibit 5: Peer group comparison

 

Price

Currency

Market cap (m)

NAV (m) (last reported)

Cash/
(debt) (m)

NAV
premium/
discount

NAV per share (p)

Allied Minds

52.6

GBP

127

242

25

0.53

100.2

Arix Bioscience

112.5

GBP

153

270

20

0.56

171.0

Augmentum FinTech

109.5

GBP

128

135

51

0.95

114.9

Draper Esprit

419.0

GBP

494

619

100

0.80

524.0

HgCapital

232.0

GBP

934

984

79

0.95

245.0

IP Group

63.6

GBP

674

1,172

71

0.57

110.6

Malin Corporation

4.00

183

361

(24)

0.51

7.90

Mercia Asset Management

30.8

GBP

93

125

38

0.75

41.3

Oakley Capital

225.5

GBP

462

651

96

0.71

318.0

Source: Refinitiv data; Edison Investment Research. Note: Priced at 30 September 2019.

Exhibit 6: Financial summary

$'000

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

-18.9

-108.8

-4.8

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. 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.

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Australia

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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.

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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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NSW 2000, Australia

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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