Nanoco — Progress in both organic and non-organic activity

Nanoco Group (LSE: NANO)

Currency in GBP

Last close As at 04/02/2023

GBP0.37

0.50 (1.38%)

Market capitalisation

GBP117m

Nanoco — Progress in both organic and non-organic activity

During FY22, Nanoco began to scale up its programme to deliver nanomaterials to its major European customer. It also made good progress in its legal action against Samsung for wilful infringement of its IP, with a positive judgement from the inter partes reviews (IPRs) on the five patents in the case. Importantly, the £5.4m raised in June extends the cash runway for nanomaterial development and scale-up activities into CY25, which is beyond the point Nanoco expects organic activities to be self-financing.

Anne Crow

Written by

Anne Margaret Crow

Director, TMT & Industrials

scott-webb-s58uyQWc42Q-unsplash (1)

Nanoco Group

Progress in both organic and non-organic activity

FY22 results

Tech hardware and equipment

21 October 2022

Price

36.6p

Market cap

£118m

Net cash (£m) at end July 2022 (excluding lease liabilities)

2.8

Shares in issue

322.4m

Free float

85.2%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(28.0)

(4.2)

69.4

Rel (local)

(25.0)

1.3

84.1

52-week high/low

52.4p

17.1p

Business description

Nanoco Group is a global leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials, with c 560 patents. Focus applications are advanced electronics, displays, bio-imaging and horticulture.

Next event

AGM

20 December 2022

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

During FY22, Nanoco began to scale up its programme to deliver nanomaterials to its major European customer. It also made good progress in its legal action against Samsung for wilful infringement of its IP, with a positive judgement from the inter partes reviews (IPRs) on the five patents in the case. Importantly, the £5.4m raised in June extends the cash runway for nanomaterial development and scale-up activities into CY25, which is beyond the point Nanoco expects organic activities to be self-financing.

Year end

Revenue (£m)

EBITDA**
(£m)

PBT*
(£m)

EPS*
(p)

EV/sales
(x)

P/E
(x)

07/20

3.9

(2.9)

(4.9)

(1.4)

29.8

N/A

07/21

2.1

(2.9)

(4.7)

(1.3)

55.1

N/A

07/22

2.5

(2.3)

(4.6)

(1.3)

46.6

N/A

07/23e

2.9

(2.2)

(3.5)

(0.9)

39.7

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **EBITDA figures in the text add back National Insurance accruals on share-based payments. Figures in the tables do not.

Cash runway extended into CY25

As flagged in the August trading update, FY22 revenue totalled £2.5m (FY21: £2.1m), with £2.4m of this generated from Sensing applications, primarily driven by the company’s major European customer, which we have previously inferred is ST Microelectronics (ST). EBITDA losses (adding back National Insurance accruals on share-based payments) narrowed to £2.1m y-o-y from £2.8m, reflecting the higher revenues and cost-saving initiatives. Free operating cash outflow totalled £1.8m with the net monthly cash-burn brought down to under £0.2m. Following the £5.4m placing and subscription in June at 37p/share, gross cash at end FY22 was £6.8m.

Sensing activity intensifying, display activity returns

Nanoco is now working on sensing materials for eight different customers. ST is by far the most advanced, with Nanoco engaged on a fifth work package for this customer, which extends for a year from May 2022. While still early stages, management also reports an increase in enquiries in display and the business has restarted small-scale sampling for interested customers. We leave our FY23 estimates, which exclude any revenues from potential production orders from ST, unchanged until there is better visibility of the ramp-up timing and initial use case.

Valuation: Dependent on patent litigation outcome

Ahead of any of the customer programmes definitely moving to commercial production, we believe that much of Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung, an outcome that we believe is much more likely given the positive verdict from the US Patent Trial and Appeal Board (PTAB) in May. Although the value of a potential payout has not been disclosed, we calculate that lost revenue in the United States attributable to the patent infringement to date could be in the region of US$200–250m or more. Any damages awarded could also make an additional allowance for future sales of infringing TVs and a possible uplift for wilfulness.

FY22 financial performance shows sensing activity intensifying

Revenues rose by £0.4m year-on-year in FY22 to £2.5m. This reflected higher levels of development activity related to nanomaterials for sensing applications, specifically infra-red materials for enhancing the sensitivity of silicon sensors. The significant majority of these revenues relate to the company’s work with ST. The current work package is focused on the scale-up and final validation of two materials, thus laying further foundations for commercial shipments to be enabled. The work package also includes development work on a third material. The company also reports promising progress with its Asian chemicals customer, although this work is at an earlier stage.

Adjusted EBITDA losses narrowed from £2.9m to £2.3m (or from £2.8m to £2.1m if we add back accruals on National Insurance for share based payments) as a result of: (1) higher revenues; (2) headcount reduction during H121 when the business was restructured around its core competencies of R&D, scale up and production; (3) lower patent maintenance costs following the decision to focus on protecting the IP most likely to generate a return in the short to medium term; and (4) general cost control. The cost reduction programme, which includes consolidating all activities at the Runcorn site, has cut the average monthly cash burn from £0.4m in FY21 to under £0.2m.

Year-end net cash (excluding £0.17m IFRS 16 lease liabilities) increased to £2.8m from £0.3m a year ago. There was minimal investment in tangible or intangible assets (£0.14m) assets. Following a placing and subscription in June at 37p/share raising £5.4m (net), which was significantly oversubscribed, gross cash at the end of the financial year was £6.8m. Management estimates that the fund-raising has extended the cash runway for nanomaterial development and scale-up activities into CY25, which is beyond the point when it expects organic activities to be self-financing.

We made minor adjustments to our FY23 estimates in September following management’s statement that a sequence of purchase orders from several existing customers for development work and validation materials meant that FY23 revenues were likely to be 20% higher than FY22, rather than at a similar level. We have not changed them subsequently. These estimates do not model any potential revenues associated with commercial production of nano-materials for sensing or other applications.

Under an agreement signed in May 2020, ST is committed to taking a specified minimum volume of nanomaterials from Nanoco if the enhanced sensors gain market traction and commercial volumes are required. These materials would be produced at the existing facility in Runcorn. We will therefore review our estimates when there is better visibility of ST’s requirements. The potential impact on FY23 revenues will depend on when any potential production ramp-up begins and on the initial use case. Nanoco’s sensing materials are being incorporated into sensing chips that 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.

Realising value from organic activities

Nanoco is working on sensing materials for five different customers. As the FY22 revenue split (see above) shows, ST is by far the most significant customer and is likely to remain so in the immediate future because the fifth work package from this customer extends a year from May 2022 and delivers a monthly revenue run rate equivalent to that delivered in H122 (ie £1.8m for a 12-month period). Nanoco has received additional purchase orders for development and validation materials from ST since the fifth work package was announced in May. Nanoco is supplying nanomaterials to ST so its partner can manufacture sensing devices for its end-customers to try out in complete electronic devices.

Exhibit 1: Sensing portfolio development

Source: Nanoco Group

In September 2022, Nanoco announced that it had received an additional development work package and orders for materials from a major Asian chemical company and work for other customers. 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 activity comes back

Interestingly, the company is now experiencing growing expressions of interest in its display materials. This resurgence has, in part, been triggered by the validation of Nanoco IP by the US Patent Trial and Appeal Board (PTAB). Equally, the adoption of Restriction of Hazardous Substances (RoHS) type legislation in a number of geographies and a broader focus on environmental issues are also driving interest in Nanoco’s cadmium-free quantum dots (QDs).

Nanoco has now restarted small-scale sampling activity for potential customers and is engaged in technical and commercial propositions with a number of customers. The company is also reviewing non-Samsung QD TVs/displays to gauge whether Nanoco’s IP is being infringed.

While it is early days yet, the market opportunity is significant. Market analysts are still forecasting significant uptake of QD televisions, with TDS estimating that QD television shipments will grow from under 50m in 2022 to over 200m by 2030. Samsung’s share of the market has now dropped below 90%, opening up the market for independent suppliers.

Realising value from patent litigation

Nanoco and Samsung initially worked together to develop cadmium-free QDs based on Nanoco’s IP. However, in 2015 Samsung ended the collaboration and launched its QD-based televisions without entering into a supply or licensing agreement with Nanoco. As a consequence of that, Nanoco initiated a patent infringement against Samsung in February 2020. The lawsuit alleges that Samsung wilfully infringed the patents relating to Nanoco’s unique synthesis and resin capabilities for QDs. Nanoco is seeking a permanent injunction from further acts of infringement and unspecified but significant monetary damages. The litigation activity involves two parallel processes: a trial in a Texas court and a review by the US PTAB (see Exhibit 2).

In May 2022 the US PTAB determined in favour of Nanoco in respect of all 47 claims in the five patents. This means that the trial will focus on infringement and damages, with validity effectively a settled matter. This focus was reinforced in August when a judge rejected Samsung’s motion to change the definition of a technical term in the case, in effect upholding the decision made regarding technical definitions during the Markman hearing in March 2021. The court hearing will last for one week, at the end of which the outcome will be announced, provided that there has been no pre-agreed settlement. The court hearing was originally scheduled to start on 12 September 2022 but was rescheduled to 3 October 2022 because the court had scheduled a number of trials on the September date on the basis that the majority of cases settle before trial. The trial was not held in October for the same reason and has not been rescheduled yet.

Exhibit 2: Samsung litigation timeline

Source: Nanoco Group

In its interim statement, Nanoco noted that, if the trial verdict is favourable, it was likely to commence further litigation in territories where it has registered its patents and where the legal process is faster than the United States and, importantly, where injunctions are more commonly granted. (Injunctions are rare in the United States unless an infringer is a direct competitor.) While this could potentially result in payouts to Nanoco while the outcome of the US trial is still being appealed, it is more likely in management’s opinion to lead to additional pressure on Samsung to come to the negotiating table with a meaningful settlement offer covering all global markets. In August Nanoco filed a lawsuit against Samsung in Germany based on a sister patent to one of the patents in the US litigation, because Germany is one of the largest European markets for the sale of high-end televisions. The funder for the US litigation has agreed an expanded budget on similar commercial terms as the existing funding. The group is actively reviewing options for similar litigation in other territories where its technology has been patented and Samsung is believed to have made significant sales.

Exhibit 3: Financial summary

£m

2020

2021

2022

2023e

Year end 31 July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

Revenue

 

 

3.9

2.1

2.5

2.9

Cost of Sales

(0.3)

(0.2)

(0.4)

(0.6)

Gross Profit

3.5

1.9

2.0

2.3

EBITDA

 

 

(2.9)

(2.9)

(2.3)

(2.2)

Operating profit (before amort. and excepts.)

 

 

(4.8)

(4.6)

(4.2)

(3.0)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.7)

0.0

0.0

0.0

Share-based payments

(0.4)

(0.4)

(0.6)

(0.7)

Reported operating profit

(5.9)

(5.0)

(4.8)

(3.7)

Net Interest

(0.1)

(0.1)

(0.5)

(0.5)

Profit Before Tax (norm)

 

 

(4.9)

(4.7)

(4.6)

(3.5)

Profit Before Tax (reported)

 

 

(6.0)

(5.1)

(5.2)

(4.2)

Reported tax

0.9

0.7

0.5

0.5

Profit After Tax (norm)

(4.0)

(4.0)

(4.1)

(3.0)

Profit After Tax (reported)

(5.1)

(4.4)

(4.7)

(3.7)

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(4.0)

(4.0)

(4.1)

(3.0)

Net income (reported)

(5.1)

(4.4)

(4.7)

(3.7)

Average Number of Shares Outstanding (m)

287

306

308

322

EPS - normalised (p)

 

 

(1.39)

(1.30)

(1.32)

(0.93)

EPS - normalised fully diluted (p)

 

 

(1.39)

(1.30)

(1.32)

(0.93)

EPS - basic reported (p)

 

 

(1.77)

(1.44)

(1.52)

(1.15)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

4.6

3.4

1.8

1.4

Intangible Assets

3.7

2.9

1.6

1.4

Tangible Assets

0.9

0.5

0.2

0.0

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

7.2

5.8

9.0

6.9

Stocks

0.1

0.1

0.2

0.1

Debtors

1.0

1.2

1.5

1.2

Cash & cash equivalents

5.2

3.8

6.8

5.1

Other

0.9

0.7

0.5

0.5

Current Liabilities

 

 

(3.6)

(2.4)

(2.4)

(2.3)

Creditors

(2.3)

(1.6)

(1.5)

(1.5)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

(0.6)

(0.5)

(0.2)

(0.2)

Short term bank debt

0.0

0.0

0.0

0.0

Other

(0.6)

(0.3)

(0.7)

(0.7)

Long Term Liabilities

 

 

(1.3)

(3.8)

(4.0)

(4.0)

Long term financial leases

(0.5)

(0.1)

(0.0)

(0.0)

Loan notes

(0.5)

(3.5)

(3.9)

(3.9)

Other long-term liabilities

(0.2)

(0.1)

(0.1)

(0.1)

Net Assets

 

 

7.0

3.1

4.3

1.9

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

7.0

3.1

4.3

1.9

CASH FLOW

Operating Cash Flow

(3.0)

(2.8)

(2.3)

(2.2)

Working capital

(1.4)

(1.4)

0.1

0.3

Exceptional & other

(0.8)

(0.1)

0.0

0.0

Tax

1.1

0.9

0.5

0.7

Net Operating Cash Flow

 

 

(4.1)

(3.5)

(1.7)

(1.2)

Capex

(0.7)

(0.3)

(0.1)

(0.4)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

0.0

(0.0)

(0.0)

(0.1)

Equity financing

3.2

0.0

5.4

0.0

Dividends

0.0

0.0

0.0

0.0

Other

(0.8)

2.3

(0.6)

0.0

Net Cash Flow

(2.4)

(1.5)

3.0

(1.7)

Opening net debt/(cash)

 

 

(6.6)

(4.7)

(0.3)

(2.8)

FX

0.0

0.0

(0.4)

0.0

Other non-cash movements

0.6

(3.0)

0.0

0.0

Closing net debt/(cash)

 

 

(4.7)

(0.3)

(2.8)

(1.1)

Source: Nanoco Group accounts, Edison Investment Research

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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 £60,000 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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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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 £60,000 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 2022 Edison Investment Research Limited (Edison).

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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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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

1185 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

1185 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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Games Workshop Group — Battling on

Games Workshop (GAW) is a global leader in tabletop miniature gaming. Management’s focus on product quality and innovation with greater customer engagement and geographic distribution has delivered impressive growth in profitability and cash returns, with an enviable return on capital (118% in FY22). Our forecasts of continued revenue and profit growth in FY23–24, albeit more muted than recent years due to phasing of new edition launches, lower P/E multiples versus recent highs is attractive in more troubled economic times. Our DCF-based valuation is £100/share.

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