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Last close As at 17/03/2023
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Research: TMT
Nanoco Group has signed the final agreements to settle the litigation with Samsung on a no-fault basis for the alleged infringement of the group’s intellectual property (IP), with Samsung paying Nanoco $150m (£125m) in cash. Nanoco’s H123 performance relating to the organic activities was slightly ahead of management’s expectations. We have revised our estimates to reflect both the settlement, which includes £3.0m in licence revenues recognisable in H223 and takes the group from negative to positive EBITDA for FY23, and the H123 trading update.
Nanoco Group |
Litigation settlement concluded |
Litigation settlement and trading update |
Tech hardware and equipment |
8 February 2023 |
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Nanoco Group is a research client of Edison Investment Research Limited |
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Nanoco Group has signed the final agreements to settle the litigation with Samsung on a no-fault basis for the alleged infringement of the group's intellectual property (IP), with Samsung paying Nanoco $150m (£125m) in cash. Nanoco’s H123 performance relating to the organic activities was slightly ahead of management’s expectations. We have revised our estimates to reflect both the settlement, which includes £3.0m in licence revenues recognisable in H223 and takes the group from negative to positive EBITDA for FY23, and the H123 trading update.
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 |
1.0 |
(0.3) |
0.05 |
0.0 |
540 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding revenues from production orders and including £3.0m in licence revenues relating to the settlement with Samsung.
$150m (£125m) cash settlement agreed
The settlement ends all global litigation with Samsung, including the lawsuits in China and Germany. After deducting litigation costs, Nanoco will retain over $90m (£75m) net proceeds. The settlement will be paid in two equal tranches, one receivable by 5 March 2023 and the second by 3 February 2024. Nanoco intends to return a ‘material’ proportion of the proceeds to shareholders once the second payment has been received. Importantly, Nanoco retains full freedom to operate in all markets, territories, products and material types.
Sensing material scale-up on track
Nanoco’s H123 trading update notes that the organic business has delivered successfully on the technical milestones for the European electronics and Asian chemical customers and supported an increase in demand for volumes of development materials. Revenue remains comfortably in line with management’s expectations, while close control of costs combined with foreign exchange (fx) tailwinds means that the FY23 adjusted EBITDA loss from the organic business is expected to be narrower than management’s previous expectations. Net cash consumption during H123 was £0.8m, giving a cash balance of £6.0m at the period end, also comfortably in line with management’s expectations.
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.
Revisions to estimates
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Exhibit 1: Changes to estimates |
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Source: Company reports, Edison Investment Research |
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We make the following changes to our estimates, which exclude any potential production revenues:
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We increase revenues from the organic activity by £0.1m and reduce operating costs by £0.1m to reflect commentary in the trading update. These may be subject to further change depending on fx movements. While the business is on track to deliver two fully validated production materials for use in infrared sensing applications in anticipation of receiving production orders later in CY23, we do not currently model any production revenues in FY23.
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The settlement with Samsung is structured as two agreements: an IP licence agreement worth $65m (£54m), which encapsulates royalties that would have been paid in the past or the future, and an IP sales agreement worth $85m (£71m, see following bullet point). The income from the IP licence agreement will be accounted for in accordance with IFRS 15 and will be recognised over the average estimated remaining life of the existing entire IP portfolio (excluding the IP sold to Samsung), which is approximately nine years. This gives rise to a significant deferred income balance of c £54.0m and annual revenue of £6.0m until the deferred income has been recognised in full (ie c £3.0m in licence revenues for H223).
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The IP sale agreement covers the sale of a number of non-core patents from Nanoco to Samsung, which does not include the patents scheduled to be presented in the trial. The sale is treated as a profit on disposal of intangible assets in line with IAS38 and is expected to generate a net profit on disposal of c £70.0m based on the $85m sale proceeds netted against the book value of the patents. We net this profit on disposal against the cost of the litigation (c £47.0m), which will be expensed in full in FY23, and treat it as an exceptional item. There will also be a one-off interest charge of c £4.7m linked to loan notes that were executed in July 2021, which is also netted off against the profit on disposal, giving a total exceptional profit of £18.3m.
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Nanoco expects that the net cash tax payable in FY23 related to the settlement will be modest, primarily because at the end of FY22 the group had £40.5m of accumulated losses to offset against any potential future profits. We are not modelling this until management has more clarity on the impact of the settlement on the group’s eligibility for R&D tax and Patent Box credits.
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The $150m (£125m) cash settlement is being paid in two equal tranches, the first to be paid by 5 March 2023 and the second by 3 February 2024, so we model a cash payment of £62.5m in FY23, which is netted off against the payment of litigation costs of £47.0m and the one-off interest charge to give £10.8m. Management has not disclosed what proportion of the settlement will be distributed to shareholders other than noting it will be ‘material’. Even excluding the proceeds from the settlement, management estimates that the cash runway is sufficient to fund nanomaterial development and scale-up into CY25, at which point it expects organic activities to be self-financing.
We note that Nanoco’s rights to its core IP have been fully validated by the legal process, indicating that, longer term, there is potential for further income from the display market. This may be in the form of successful litigation against other parties that Nanoco believes may have infringed its IP, or third parties purchasing cadmium-free quantum dots (CFQDs) from Nanoco or its potential licensees. We note that the level of enquiries regarding CFQDs has picked up since it has looked increasingly likely that Nanoco was going to win in its litigation case against Samsung, so much so that the company has begun to re-commission its CFQD dot facility in Runcorn to address demand for material for use in displays.
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Exhibit 2: Financial summary |
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Source: Company reports, Edison Investment Research Note: *Including £3.0m licence revenue from Samsung. **£70.0m profit on disposal of IP netted against £47.0m litigation costs and £4.7m one-off finance charges. ***Company awaiting guidance from tax specialist on status of R&D and Patent Box credits. |
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