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Nanoco’s material development and supply agreement with a major US corporation provides firm support to our near term estimates and the company’s balance sheet. The partner’s funding of a major expansion to Nanoco’s Runcorn manufacturing facility also improves the probability of a sharp inflection in revenues in FY19 and FY20 while providing welcome diversification to the company’s medium term opportunity pipeline. Execution risk remains, but we believe that Nanoco’s prospects are looking meaningfully stronger.
Written by
Nanoco Group |
Rabbit pulled out of the hat |
Strategic partnership |
Tech hardware & equipment |
8 February 2018 |
Share price performance
Business description
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Analyst
Nanoco Group is a research client of Edison Investment Research Limited |
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Nanoco’s material development and supply agreement with a major US corporation provides firm support to our near term estimates and the company’s balance sheet. The partner’s funding of a major expansion to Nanoco’s Runcorn manufacturing facility also improves the probability of a sharp inflection in revenues in FY19 and FY20 while providing welcome diversification to the company’s medium term opportunity pipeline. Execution risk remains, but we believe that Nanoco’s prospects are looking meaningfully stronger.
Year end |
Revenue (£m) |
PBT |
EPS |
DPS |
EV/sales |
P/E |
07/16 |
0.5 |
(12.3) |
(5.2) |
0.0 |
125.8 |
N/A |
07/17 |
1.3 |
(10.6) |
(4.5) |
0.0 |
47.4 |
N/A |
07/18e |
4.7 |
(6.4) |
(2.3) |
0.0 |
13.5 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
New partnership with a major US corporation
The partnership is with a large undisclosed US corporation to scale up and mass produce nano-particles for advanced electronic devices. For client confidentiality reasons, the announcement does not give any detail away other than that – but by inference we assume that the application does not sit within one of the company’s established display, solar, lighting or healthcare verticals.
Funding an expansion of Runcorn
Financially, the partnership will support near term cash flows and revenues with the potential to scale revenues significantly in the longer term. The partner will fund the expansion of Nanoco’s Runcorn manufacturing facility, to support the manufacture of the required materials in the volumes anticipated. Nanoco will be paid on a milestone basis during the development period and then for commercial supply which is anticipated in early calendar 2019.
Adding to progress in displays
The company’s AGM statement on 8 January flagged that the company is now making firm progress in displays, with a number of high end computer displays moving forward towards volume production.
Valuation: Expansion and diversification of opportunities to scale
At this stage there is too little detail to either alter our near term estimates or introduce new forecasts for FY19 or beyond. Visibility on the implications of both this new partnership and progress in display should progressively improve over the course of this year. Nevertheless, with this new partner providing incremental revenue potential and diversification of customers/applications, Nanoco’s prospects now look meaningfully more promising.
Exhibit 1: Financial summary
£'m |
2015 |
2016 |
2017 |
2018e |
||
31-July |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
2.0 |
0.5 |
1.3 |
4.7 |
Cost of Sales |
(0.3) |
(0.2) |
(0.3) |
(1.3) |
||
Gross Profit |
1.7 |
0.3 |
1.1 |
3.4 |
||
EBITDA |
|
|
(8.1) |
(11.2) |
(9.4) |
(5.5) |
Operating profit (before amort. and except). |
|
(9.5) |
(12.5) |
(10.7) |
(6.6) |
|
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(0.9) |
0.0 |
(0.0) |
0.0 |
||
Share-based payments |
(0.6) |
(0.3) |
(0.2) |
(0.2) |
||
Reported operating profit |
(11.0) |
(12.8) |
(10.9) |
(6.8) |
||
Net Interest |
0.1 |
0.2 |
0.0 |
0.2 |
||
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) |
|
|
(9.3) |
(12.3) |
(10.6) |
(6.4) |
Profit Before Tax (reported) |
|
|
(10.9) |
(12.6) |
(10.9) |
(6.6) |
Reported tax |
1.9 |
2.0 |
1.8 |
0.0 |
||
Profit After Tax (norm) |
(9.3) |
(12.3) |
(10.6) |
(6.4) |
||
Profit After Tax (reported) |
(9.0) |
(10.6) |
(9.1) |
(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) |
(9.3) |
(12.3) |
(10.6) |
(6.4) |
||
Net income (reported) |
(9.0) |
(10.6) |
(9.1) |
(6.6) |
||
Basic average number of shares outstanding (m) |
221 |
237 |
238 |
278 |
||
EPS - normalised (p) |
|
|
(4.22) |
(5.20) |
(4.46) |
(2.29) |
EPS - diluted normalised (p) |
|
|
(4.22) |
(5.20) |
(4.46) |
(2.29) |
EPS - basic reported (p) |
|
|
(4.05) |
(4.47) |
(3.83) |
(2.38) |
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
nm |
(76.6) |
179.7 |
251.8 |
||
Gross Margin (%) |
84.4 |
62.8 |
80.6 |
72.0 |
||
EBITDA Margin (%) |
(400.4) |
(2,367.4) |
(711.2) |
(117.5) |
||
Normalised Operating Margin |
(465.9) |
(2,639.4) |
(803.5) |
(140.6) |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
3.9 |
3.7 |
3.5 |
5.2 |
Intangible Assets |
1.8 |
2.4 |
2.6 |
3.2 |
||
Tangible Assets |
2.1 |
1.3 |
0.9 |
2.0 |
||
Investments & other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
27.2 |
18.7 |
8.9 |
11.1 |
Stocks |
0.2 |
0.2 |
0.2 |
0.2 |
||
Debtors |
0.9 |
2.0 |
0.7 |
1.2 |
||
Cash & cash equivalents |
24.3 |
14.5 |
5.7 |
7.4 |
||
Other |
1.8 |
2.0 |
2.4 |
2.4 |
||
Current Liabilities |
|
|
(2.0) |
(3.0) |
(1.4) |
(1.8) |
Creditors |
(1.9) |
(2.4) |
(1.3) |
(1.3) |
||
Tax and social security |
0.0 |
0.0 |
0.0 |
0.0 |
||
Short term borrowings |
(0.1) |
(0.0) |
0.0 |
0.0 |
||
Other |
0.0 |
(0.5) |
(0.1) |
(0.6) |
||
Long Term Liabilities |
|
|
(0.0) |
(0.6) |
(0.6) |
0.0 |
Long term borrowings |
(0.0) |
0.0 |
0.0 |
0.0 |
||
Other long term liabilities |
0.0 |
(0.6) |
(0.6) |
0.0 |
||
Net Assets |
|
|
29.1 |
18.8 |
10.5 |
14.6 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
29.1 |
18.8 |
10.5 |
14.6 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
(8.1) |
(11.2) |
(9.4) |
(5.5) |
||
Working capital |
0.2 |
0.5 |
(0.3) |
(0.6) |
||
Exceptional & other |
(0.9) |
0.0 |
(0.0) |
0.0 |
||
Tax |
1.3 |
1.8 |
1.9 |
1.9 |
||
Net operating cash flow |
|
|
(7.6) |
(8.9) |
(7.8) |
(4.2) |
Capex |
(0.9) |
(1.1) |
(1.6) |
(2.3) |
||
Acquisitions/disposals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net interest |
0.1 |
0.2 |
0.1 |
0.2 |
||
Equity financing |
21.1 |
0.0 |
0.6 |
8.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(0.6) |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
12.2 |
(9.7) |
(8.8) |
1.7 |
||
Opening net debt/(cash) |
|
|
(12.2) |
(24.4) |
(14.5) |
(5.7) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
0.0 |
(0.1) |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
(24.4) |
(14.5) |
(5.7) |
(7.4) |
Source: Company Reports, Edison Group
|
|
FY18 closed in line with management expectations showing good top-line progress overall despite some UK market variability. The latter appears to have affected sentiment – as reflected in single-digit prospective P/E multiples – but there are positive mix effects also that should not be overlooked. A rising dividend provides an additional attraction.