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Research: TMT
Nanoco’s H123 revenues benefited from the successful delivery of technical milestones for its European electronics customer, taking it close to full production validation of two different wavelength materials for use in sensing chips. Shortly after the period end, Nanoco signed the final agreements to settle the litigation with Samsung. The settlement frees management to concentrate on getting the company ready for volume production in anticipation of receiving its first production order later in CY23.
Nanoco |
Concentrating on organic business going forward |
Interim results |
Tech hardware and equipment |
30 March 2023 |
Share price performance
Business description
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Nanoco Group is a research client of Edison Investment Research Limited |
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Nanoco’s H123 revenues benefited from the successful delivery of technical milestones for its European electronics customer, taking it close to full production validation of two different wavelength materials for use in sensing chips. Shortly after the period end, Nanoco signed the final agreements to settle the litigation with Samsung. The settlement frees management to concentrate on getting the company ready for volume production in anticipation of receiving its first production order later in CY23.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
07/20 |
3.9 |
(2.9) |
(4.9) |
(1.4) |
0.0 |
N/A |
07/21 |
2.1 |
(2.8) |
(4.7) |
(1.3) |
0.0 |
N/A |
07/22 |
2.5 |
(2.1) |
(4.6) |
(1.3) |
0.0 |
N/A |
07/23e** |
6.0 |
0.5 |
(0.8) |
(0.3) |
0.0 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Including £3.0m licence revenues relating to the settlement with Samsung.
Scale-up of sensing material on track
During H123 Nanoco successfully delivered on the technical milestones for the European electronics and Asian chemical customers and supported an increase in demand for volumes of development materials. Revenue jumped by 45% year-on-year to £1.6m, while cost savings from exiting the Manchester facility helped offset inflationary cost increases, so adjusted EBITDA losses were stable at £1.1m. Net cash consumption during H123 was £0.8m, giving a cash balance of £6.0m at the period end. We adjust our estimates to reflect higher headcount costs as Nanoco prepares for volume production in anticipation of receiving its first production order from the European electronics customer later this calendar year.
Litigation against Samsung successfully concluded
Shortly after the H123 period end, Nanoco signed the final agreements to settle the litigation with Samsung on a no fault basis for the alleged infringement of the group’s IP. Samsung agreed to pay Nanoco $150m (£124.3m) in cash in two equal tranches. The first of these has been paid, the second is payable by 3 February 2024 (see our February note for details). After deducting litigation costs, Nanoco will retain c £71.4m net proceeds after costs.
Valuation: Primary value from settlement
Ahead of any of the customer programmes definitely moving to commercial production, much of Nanoco’s value lies in the settlement from Samsung, which has now completed. We will explore the value inherent in the organic business when there is better visibility of production revenues. Meanwhile we note that deployment of its sensing materials by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues for Nanoco, while the existing production capacity in Runcorn could generate sensing application revenues of £100m/year working 24/7.
H123 performance
Sensing activity drives H123 performance
Exhibit 1: Comparison of H122, H222 and H123 results
£m |
H122 |
H222 |
H123 |
Revenue attributable to ST |
0.9 |
1.2 |
1.2 |
Total sales revenue |
1.1 |
1.4 |
1.6 |
Cost of sales |
(0.1) |
(0.3) |
(0.3) |
Gross profit |
1.0 |
1.1 |
1.3 |
Grants |
0.2 |
0.2 |
0.1 |
Normalised operating expenses |
(2.4) |
(2.1) |
(2.4) |
EBITDA |
(1.1) |
(0.8) |
(1.1) |
Share-based payments |
(0.4) |
(0.3) |
(0.5) |
Depreciation, amortisation and impairment of intangible items |
(0.6) |
(1.2) |
(0.3) |
Exceptional items |
0.0 |
(0.3) |
(0.2) |
Reported operating loss |
(2.1) |
(2.6) |
(2.1) |
Finance costs (net) |
(0.2) |
(0.2) |
(0.2) |
Reported loss before tax |
(2.3) |
(2.9) |
(2.3) |
R&D tax credits |
0.3 |
0.2 |
0.3 |
Reported loss after tax |
(2.1) |
(2.6) |
(2.1) |
Adjusted EPS (p) |
(0.56) |
(0.50) |
|
Basic and diluted EPS (p) |
(0.67) |
|
(0.64) |
Source: Company data
H123 revenues were higher than H122 and H222 at £1.6m, reflecting intensifying activity on programmes for the European electronics and Asian chemical customers. £1.2m was attributable to services and materials supplied to the European customer, who we have previously inferred is ST Microelectronics, as Nanoco approached full production validation of two nano-materials for the customer. Adjusted EBITDA losses were stable at £1.1m. The cost savings associated with consolidating all activities at the Runcorn site were offset by recent inflation linked cost increases. Exceptional items comprised £0.1m litigation costs and £0.1m employer’s National Insurance on share-based payments.
Net cash (excluding £2.0m IFRS 16 lease liabilities) reduced by £0.8m during the half-year to £6.0m at end January 2023. Key elements of this movement were the EBITDA loss, a £0.9m drop in trade and other receivables following the receipt of a significant payment under the JDA (joint development agreement) with ST, a £0.5m reduction in deferred income following a milestone payment under the JDA and £0.2m (negligible in H122 and H222) investment in tangible fixed assets as the company moved close to production validation of the two nano-materials for sensing and brought the facility for making CFQDs (cadmium-free quantum dots) back into operation. Excluding the cash from the Samsung settlement, management estimates that the company’s cash runway is sufficient to support nanomaterial development and scale-up into CY 2025.
Changes to estimates
We adjusted our FY23 estimates in February to reflect the settlement from Samsung as well as commentary on revenues and operating losses in the trading update. These adjustments included adding £3.0m licence revenues relating to the settlement with Samsung.
We make further adjustments as follows:
■
An additional £0.5m indirect costs during H223 as Nanoco increases headcount in anticipation of commencing production of sensing materials during CY 2024.
■
Removal of £0.5m tax credit payable from the profit and loss account because of the uncertainty regarding the interaction of the profits, potential utilisation of historic losses and the UK Patent Box scheme.
■
Litigation costs, which are treated as an exceptional item and netted against the £70.0m profit on disposal of the IP to give £19.8m exceptional EBIT, of £50.2m vs initial estimate of c £47.0m.
■
£62.1m proceeds from the settlement receivable in FY24 and deferred licence income of £44.8m due after FY23 shown separately on the balance sheet rather than netted together. £2.7m tax asset added to the balance sheet which relates to the Korean withholding tax payable on the second tranche of the settlement when it is received in FY24.
■
Net cash proceeds from the settlement (in FY23) of £4.5m added to the cashflow. This is comprised of £35.2m proceeds from the IP sale and £26.9m deferred licence income netted against £50.2m litigation costs, £2.7m withholding tax payable in South Korea associated with the first tranche of the settlement which was received in FY23 and £4.7m interest payable on loan notes triggered by the settlement. Our previous estimate of the net cash proceeds was £10.8m, with the difference comprising higher than estimated litigation costs, the Korean withholding tax payable on the first tranche of the settlement and £0.3m lower proceeds from disposal of the IP and deferred licence revenue which relates to a change in foreign exchange rates used. £2.7m debit (shown as other in the cashflow) relating to the £2.7m tax asset added to the balance sheet in respect of the Korean withholding tax to be paid in FY24.
Exhibit 2: Revisions to estimates
Y/E July |
FY22 |
FY23 |
|||
£'m |
Actual |
New |
Old |
% change |
|
Revenues |
2.5 |
6.0 |
6.0 |
0.0% |
|
Gross profit |
2.0 |
5.4 |
5.4 |
0.0% |
|
EBITDA |
(2.1) |
0.5 |
1.0 |
-50.8% |
|
Normalised PBT |
(4.6) |
(0.8) |
(0.3) |
-154.2% |
|
Normalised net income |
(4.1) |
(0.8) |
0.2 |
N/A |
|
Normalised diluted EPS (p) |
(1.3) |
(0.26) |
0.05 |
N/A |
|
Net debt/(cash) |
(2.8) |
(5.3) |
(14.4) |
63.4% |
|
Source: Edison Investment Research
Progress on nanomaterial development and scale-up
Sensing materials
The H123 revenue split (see above) shows that ST is by far the most significant customer. It is likely to remain so in the immediate future because we estimate the fifth work package from ST will generate £1.8m in revenues between May 2022 and May 2023. This work-package covers the final phase of scale-up of a second, longer wavelength material which is close to full production validation and the development of a third material. (Nanoco has already developed and scaled-up production of a shorter wavelength material and is close to full production validation of this material.) The inclusion of development work on a third material emphasises the long-term nature of the relationship with the customer. Nanoco is supplying nanomaterials to ST so its partner can manufacture sensing devices for its end-customers to try out in complete electronic devices. Nanoco has received additional purchase orders for development and validation materials from ST since receiving the fifth work package. Management expects to receive production orders from ST by the end of CY 2023.
Under an agreement signed in May 2020, ST is committed to taking a specified minimum volume of nanomaterials from Nanoco if its enhanced sensing devices gain market traction and commercial volumes are required. These materials would be produced at the existing facility in Runcorn. The potential impact on FY24 revenues will depend on when any potential production ramp-up begins and on the initial use case because ST’s sensing chips may be used in many applications. Deployment by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues for Nanoco, while deployment in a more niche application, such as virtual reality (VR) glasses, would generate lower revenues, but is likely to catalyse take-up by other customers. In the longer term, should Nanoco’s material be widely deployed in multiple handset models or other high-volume devices, we note that the existing production capacity in Runcorn could generate sensing application revenues of £100m/year working 24/7.
Nanoco is working with four other customers on materials for use in sensing applications. In September 2022 Nanoco announced that it had received an additional development work package and orders for materials from a major Asian chemical company as well as work for other customers (ie in addition to work for ST). As with ST, Nanoco is supplying nanomaterials to the Asian customer so it can manufacture sensing devices for its end-customers to try out in complete electronic devices.
Display materials
The level of enquiries regarding CFQDs for display applications picked up once it looked likely that Nanoco would win its litigation case against Samsung. For example, a major display OEM is testing samples. Interest has been so high that the company has begun to re-commission its CFQD facility in Runcorn to address demand for samples. In addition, since Nanoco’s rights to its core IP have been fully validated by the legal process, the company has retained an advisor to support an internal team assessing whether any other companies using CFQDs in displays are infringing Nanoco’s IP.
Research: Consumer
Greggs has entered the second full financial year of its five-year growth plan having exceeded our initial FY22 revenue estimates, helped by elevated external inflationary pressures, and with profit in line with management’s expectations. Despite the more challenging external environment, Greggs made good progress with the majority of its revenue growth initiatives in FY22. Following the expected normalisation of the cost base, which hampered profit growth in FY22, we forecast more consistent pre-tax profit growth in FY23–25 (three-year CAGR of 11%) relative to sales growth (12% CAGR).
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