Meeting of minds with shareholders

Allied Minds 13 December 2019 Update
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Allied Minds

Meeting of minds with shareholders

Restructuring

Alternative asset manager

13 December 2019

Price

44.2p

Market cap

£107m

US$1.34/£

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

(10.2)

(24.1)

(36.4)

Rel (local)

(9.6)

(24.0)

(40.7)

52-week high/low

84.2p

44.2p

Business description

Allied Minds is a technology investment company with a concentrated portfolio focused on early-stage spin-outs from US federal government laboratories and universities.

Next events

Return of capital

Early Q120

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

Following a dialogue with shareholders, Allied Minds has announced a number of restructuring initiatives, including board changes, to cut costs and better align employee and shareholder interests. Mike Turner will step down as co-CEO, leaving Joe Pignato as CEO and CFO. The company has made amendments to the executive director compensation plan, including a reduction of the maximum bonus, elimination of the Management Incentive Plan and forfeiture of certain long-term incentive plan (LTIP) grants. These restructuring initiatives will allow recurring central costs to be cut by 20%, to $6m pa, in line with the Strategic Review announced in April 2019. Allied Minds now expects to be able to return c $40m (12.4p per share) to shareholders from the proceeds of the disposal of Hawkeye 360 ($65.6m) by early Q120.

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

0.29

06/18

350.1

66.0

416.1

132.4

0.33

12/18*

226.7

50.6

277.3

88.8

0.50

06/19*,**

266.1

31.3

297.3

91.9

0.48

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.

Board changes and restructuring

Mike Turner will step down as co-CEO effective 10 March 2020. Joe Pignato will continue in the role of CEO and CFO (previously co-CEO and CFO). Fritz Foley (non-executive director) will step down from the board with Harry Rein, the senior independent non-executive director, becoming chair of the company’s audit committee in his place. Additionally, Mark Lerdal (Leaf Clean Energy, MP2 Capital, KKR Finance) has been appointed as a non-executive director with immediate effect.

The transition to a single CEO, together with the additional cost-cutting measures announced, will allow Allied Minds to cut its central costs by an additional 20% to c $6m pa. This will allow it to increase the amount of capital to be returned to shareholders from the disposal of Hawkeye 360 to $40m (12.4p per share) from $32.8m (10.1p per share) previously, while still ensuring the company has sufficient cash to allow it to continue to invest in its existing assets and maximise the value of its portfolio over the medium term.

Valuation: Unjustified 52% discount to NAV

Allied Minds’ shares trade materially below the range of its peer group and at a 52% discount to our adjusted estimate of H119 NAV of 91.9p, or a 45% discount on a fully-diluted basis. We believe this level of discount is unwarranted with key assets recently validated by third-party strategic investors, together with the $40m (12.4p) return of capital expected in Q120. With management focused on preserving cash and delivering material cash exits from its remaining portfolio, we believe this provides a solid NAV on which Allied Minds should build over time.

Board changes and restructuring

The transition to a single CEO, together with additional cost-cutting measures, will allow Allied Minds to cut its central costs by an additional 20% to c $6m per annum (in line with the Strategic Review announced in April 2019) on a recurring basis commencing 1 January 2020.

Shareholder engagement

Following a constructive dialogue with investors, the board has announced further restructuring initiatives to reduce costs and further align employee and shareholder interests. Allied Minds’ major shareholders have supported these changes and, on the basis of the announced changes, Crystal Amber Fund has also withdrawn (Requisition Withdrawal) the notice of requisition (Meeting Requisition) from 21 November 2019.

Board changes

Mike Turner will step down as co-CEO and departs with effect from 10 March 2020. Joe Pignato will continue in the role of CEO and CFO (previously co-CEO and CFO). Fritz Foley (non-executive director) will step down from the board with Harry Rein, the senior independent non-executive director, stepping up to become Chair of the company’s audit committee in his place. Additionally, Mark Lerdal (Leaf Clean Energy Company, MP2 Capital, KKR Finance) has been appointed as a non-executive director with immediate effect.

Jeff Rohr will continue as chairman of the board through to the end of his second three-year term ending in June 2020, at which point he will retire from the board.

Executive remuneration

The company has also made amendments to the executive director compensation plan, including a reduction of the maximum bonus, elimination of the Management Incentive Plan and forfeiture of certain LTIP grants. Modifications to the Phantom Plan staff remuneration scheme will include the establishment of a threshold that must be met before any future payments are made to participants under the plan.

No further allocations under the Phantom Plan (subsequent to the Hawkeye 360 distribution) will be made until gross proceeds from future portfolio company liquidity events exceed the invested capital (the initial threshold of $109m represents the total capital invested in the technology portfolio to date). The threshold will increase as additional capital is invested into the existing portfolio.

Current employee unit holders in the Phantom Plan have agreed to an individual cap per employee following the disbursement from the sale of Hawkeye 360. As a result, excess proceeds above this cap due to employee departures will revert to the company and be available for distribution to shareholders, meaning that the percentage of net proceeds allocated to the Phantom Plan will decline over time.

Joe Pignato has voluntarily agreed to reduce his annual bonus target to 100% of base salary from 150%. After Mike Turner’s resignation (10 March 2020), as the last remaining employee with an interest in the Management Incentive Plan, Joe Pignato has agreed to forfeit his interest in the plan. In addition, Joe Pignato has also forfeited his last two remaining LTIP awards subject to share performance from 2017 and 2018, which were awarded prior to him being named an executive director.

Central costs and return of capital to shareholders

Together, these initiatives are expected to further reduce recurring HQ expenses to no more than $6.0m from 1 January 2020, in line with management’s strategic review announced in April 2019 (Doubling down on the winners), representing a 20% reduction from the company’s most recent guidance of $7.5m.

The additional HQ savings also allow the company to increase the amount of capital to be returned to shareholders from the disposal of Hawkeye 360. This amount is expected to increase to $40m, from the initial estimate of $32.8m, while still ensuring the company has sufficient cash to allow it to continue to invest in existing assets and maximise the value of its portfolio over the medium term, a potential three- to four-year time horizon. The company has now completed the court process and upon completion of statutory filings, management will be in a position to confirm the dates and method for returning capital to shareholders. The return of capital is expected to complete early in Q120.

Valuation: Unjustified 52% discount to NAV

As we have noted previously, given its narrowed portfolio, Allied Minds now looks less like its patient capital and direct investment peers, as it offers look-through to a concentrated number of emerging US-based technology businesses. Given Allied Minds’ focus on technology, we have chosen to exclude healthcare and life science investors from the comparator group as these are no longer relevant benchmarks.

Allied Minds’ shares currently trade at a 52% discount to our adjusted estimate of H119 NAV of 91.9p (lower following the significant recent strength of sterling), or a 45% discount on a fully-diluted basis. Allied Minds’ shares also trade materially below the range of its peer group (see Exhibit 1). On this basis, for investors who like the key assets in Allied Minds’ portfolio, all of which have been validated by third-party investors in recent funding rounds, we believe this level of discount is unwarranted.

Exhibit 1: Peer group comparison

 

Price
(p)

Market cap £(m)

NAV (£m)
(last reported)

Cash/(debt) (£m)

NAV premium/ discount

NAV per share (p)

Allied Minds

44.2

107

222*

23

0.48

91.9

Augmentum FinTech

103.5

120.8

135

51

0.90

114.9

Draper Esprit

477.0

560.8

699

100

0.80

593.0

HgCapital

251.0

1,012.6

984

79

1.02

245.0

IP Group

60.4

637.8

1,172

71

0.54

110.6

Mercia Asset Management

25.5

77.1

125

38

0.62

41.3

Oakley Capital

239.5

483.8

650

96

0.74

317.0

Mean

0.70

Median

0.77

Source: Refinitiv data; Edison Investment Research. Note: Priced at 12 December 2019. *Edison’s adjusted estimate of H119 NAV.

Exhibit 2: Financial summary

$000

2014

2015

2016

2017

2018

Year end 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)

 

 

N/A

(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.

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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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

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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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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

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London, WC1V 7EE

United Kingdom

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1,185 Avenue of the Americas

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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

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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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.

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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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