Major customer not moving to production

Nanoco 24 June 2019 Update
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Nanoco Group

Major customer not moving to production

Major partnership not renewed

Tech hardware & equipment

24 June 2019

Price

8.5p

Market cap

£24m

Net cash (£m) at 31 January 2019 (including £0.4m convertible loan)

5.7

Shares in issue

286.1m

Free float

87.8%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(77.6)

(81.9)

(79.3)

Rel (local)

(77.8)

(82.0)

(78.7)

52-week high/low

55.0p

8.5p

Business description

Nanoco Group is a global leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials. Its platform includes c 700 patents and specialist manufacturing lines. Focus applications are advanced electronics, displays, lighting and bio-imaging.

Next events

FY19 results

October 2019

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco’s announcement that its project with the major US customer will not continue when the current contract expires in December 2019 is clearly a severe setback and we have therefore cut our FY20 estimates substantially. We note though that the customer’s decision relates to a change in strategy rather than issues with the performance of Nanoco’s materials or services. The company has a strong IP base and state-of-the-art manufacturing facility with an estimated 12 months of cash to explore new commercial options including with its US customer. Following Friday’s share price drop, the £20m market capitalisation appears to assign little value to these assets.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/Sales
(x)

P/E
(x)

07/17

1.3

(10.6)

(4.5)

0.0

8.5

N/A

07/18

3.3

(7.1)

(2.6)

0.0

3.4

N/A

07/19e

6.7

(4.8)

(1.7)

0.0

1.7

N/A

07/20e

4.0

(7.8)

(2.7)

0.0

2.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Major customer changes path

The decision not to extend the current contract means that Nanoco’s major US client will not progress to volume production in the foreseeable future. The company has stated that the decision is wholly unconnected to the performance of the materials or Nanoco’s service delivery. Industry newsflow suggests the client may have opted for an alternative architecture for the component potentially deploying quantum dots. Nanoco is exploring alternative use cases for the technology with a number of customers and supply chain partners, including the major US customer, and continues to work with other customers on deployment of quantum dots in other applications including display and medical imaging.

Estimate changes

Our FY19 revenue forecast is not affected by this development. We have cut our FY20 revenues to £4.0m (from £13m), which are backed by contracts, primarily from the major US partner. With a fixed cost base of just under £10m, management expects cash balances to be c £6m at end December 2019. On this basis, we estimate that current cash balances will last until summer next year, giving the company a year to explore commercial and strategic options.

Valuation: Share price fall does not reflect IP value

The development is clearly a major blow to Nanoco’s prospects. However, we have previously highlighted that development activity in quantum dots appears to be accelerating across a number of applications and this view has not changed. The company is the largest IP holder in this field with c 750 patents and now has a new, nearly fully commissioned manufacturing facility able to output significant volumes of nanomaterials. The recent 74% share price drop values the business at a mere £24m market capitalisation, which we believe takes scant recognition of the company’s IP and asset base.

Estimate changes

Our estimates changes are displayed below.

Our revenue estimates include only the minimum commitments from the company’s tier one customer. These are service revenues, whereas our previous estimates included product revenues as well. As a consequence, our estimates show FY20 gross margin increasing.

We have also modified the FY19 cash flow to reflect the £1.4m cash paid by the US customer during H119 towards equipping a dedicated facility for electronic nanomaterials.

Exhibit 1: Estimate changes

£m

FY18

FY19e

FY20e

Actual

New

Old

% change

New

Old

% change

Revenues

3.3

6.7

6.7

0.0%

4.0

13.0

(69.2%)

Gross profit

2.9

4.9

4.9

0.0%

3.1

8.8

(64.4%)

Gross margin

87.0%

73.4%

73.4%

0.0%

78.1%

67.5%

15.7%

EBITDA

(6.2)

(4.2)

(4.2)

0.0%

(6.5)

(0.8)

677.7%

Normalised operating profit

(7.2)

(5.1)

(5.1)

0.0%

(8.1)

(2.4)

234.5%

Normalised net income

(7.1)

(4.8)

(4.8)

0.0%

(7.8)

(2.1)

266.9%

Normalised diluted EPS

(2.6)

(1.7)

(1.7)

0.0%

(2.7)

(0.7)

266.9%

Net debt/(cash)

(10.7)

(5.6)

(4.2)

32.3%

(0.5)

(1.6)

(65.2%)

Source: Company data, Edison Investment Research estimates

Valuation

As a reference point for the potential value of the assets, we note that Samsung acquired the IP of quantum dot competitor QD Vision (with a reported 250 patents) for $70m in 2016. Prior to the acquisition, QD Vision had been struggling with its products not gaining acceptance.

Exhibit 2: Financial summary

£m

2017

2018

2019e

2020e

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.3

3.3

6.7

4.0

Cost of Sales

(0.3)

(0.4)

(1.8)

(0.9)

Gross Profit

1.1

2.9

4.9

3.1

EBITDA

 

 

(9.4)

(6.2)

(4.2)

(6.5)

Operating profit (before amort. and except).

 

(10.7)

(7.2)

(5.1)

(8.1)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.0)

0.0

0.0

0.0

Share-based payments

(0.2)

(0.3)

(0.3)

(0.3)

Reported operating profit

(10.9)

(7.4)

(5.3)

(8.3)

Net Interest

0.0

0.0

0.3

0.3

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(10.6)

(7.1)

(4.8)

(7.8)

Profit Before Tax (reported)

 

 

(10.9)

(7.4)

(5.0)

(8.0)

Reported tax

1.8

1.4

1.4

1.4

Profit After Tax (norm)

(10.6)

(7.1)

(4.8)

(7.8)

Profit After Tax (reported)

(9.1)

(6.0)

(3.6)

(6.6)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

(10.6)

(7.1)

(4.8)

(7.8)

Net income (reported)

(9.1)

(6.0)

(3.6)

(6.6)

Average Number of Shares Outstanding (m)

238

272

286

286

EPS - normalised (p)

 

 

(4.46)

(2.63)

(1.67)

(2.72)

EPS - diluted normalised (p)

 

 

(4.46)

(2.63)

(1.67)

(2.72)

EPS - basic reported (p)

 

 

(3.83)

(2.21)

(1.27)

(2.32)

Dividend per share (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

179.7

150.0

101.5

0.0

Gross Margin (%)

80.6

87.0

73.4

78.1

EBITDA Margin (%)

(711.2)

(186.2)

(62.4)

(162.1)

Normalised Operating Margin

(803.5)

(215.8)

(75.9)

(201.5)

BALANCE SHEET

Fixed Assets

 

 

3.5

6.0

6.4

6.4

Intangible Assets

2.6

3.4

3.3

3.4

Tangible Assets

0.9

2.6

3.2

3.0

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

8.9

13.8

9.1

2.2

Stocks

0.2

0.2

0.5

0.1

Debtors

0.7

1.4

1.6

0.2

Cash & cash equivalents

5.7

10.7

5.6

0.5

Other

2.4

1.4

1.4

1.4

Current Liabilities

 

 

(1.4)

(3.4)

(6.7)

(6.0)

Creditors

(1.3)

(3.0)

(2.0)

(1.3)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

Other

(0.1)

(0.4)

(4.7)

(4.7)

Long Term Liabilities

 

 

(0.6)

(3.7)

(0.4)

(0.4)

Long term borrowings

0.0

0.0

0.0

0.0

Other long-term liabilities

(0.6)

(3.7)

(0.4)

(0.4)

Net Assets

 

 

10.5

12.6

8.4

2.2

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

10.5

12.6

8.4

2.2

CASH FLOW

Op Cash Flow before WC and tax

(9.4)

(6.2)

(4.2)

(6.5)

Working capital

(0.3)

4.0

(0.5)

1.1

Exceptional & other

(0.0)

0.0

0.0

0.0

Tax

1.9

1.8

1.8

1.8

Net operating cash flow

 

 

(7.8)

(0.3)

(2.9)

(3.6)

Capex

(1.6)

(3.0)

(2.6)

(1.8)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

0.1

0.0

0.3

0.3

Equity financing

0.6

7.9

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

(8.8)

4.6

(5.1)

(5.0)

Opening net debt/(cash)

 

 

(14.5)

(5.7)

(10.7)

(5.6)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.3

0.0

0.0

Closing net debt/(cash)

 

 

(5.7)

(10.7)

(5.6)

(0.5)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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.

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

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

General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. 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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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.

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

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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