Nanoco — Returning cash and investing in the business

Nanoco Group (LSE: NANO)

Last close As at 16/07/2024

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Research: TMT

Nanoco — Returning cash and investing in the business

Nanoco has announced its intention to return £33–40m of the funds won through the settlement with Samsung to shareholders, retaining £20m to execute its growth and intellectual property (IP) licensing strategy. Management expects to start this programme after it has received the second $75m tranche in February 2024 from the Samsung litigation. Operationally, multiple end-customer trials via Nanoco’s major partner are ongoing and it is seeing renewed interest from the display market. The group also intends to seek further value from its IP portfolio, having identified a number of other potentially infringing third parties.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

Nanoco Group

Returning cash and investing in the business

Business update

Tech hardware and equipment

21 June 2023

Price

19.2p

Market cap

£62m

Net cash (£m) at end January 2023 (excluding lease liabilities and cash from Samsung settlement)

6.0

Shares in issue

322.4m

Free float

84.2%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.1

(11.1)

(47.3)

Rel (local)

4.7

(13.0)

(49.7)

52-week high/low

56p

17p

Business description

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

Next events

AGM

7 July 2023

FY23 results

October 2023

Analysts

Max Hayes

+44 (0)20 3077 5721

Dan Ridsdale

+44 (0)7930 166512

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco has announced its intention to return £33–40m of the funds won through the settlement with Samsung to shareholders, retaining £20m to execute its growth and intellectual property (IP) licensing strategy. Management expects to start this programme after it has received the second $75m tranche in February 2024 from the Samsung litigation. Operationally, multiple end-customer trials via Nanoco’s major partner are ongoing and it is seeing renewed interest from the display market. The group also intends to seek further value from its IP portfolio, having identified a number of other potentially infringing third parties.

Year

end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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.

Proposed capital reduction

Nanoco is proposing a capital reduction to facilitate cash returns of £33m and £40m to shareholders as it currently lacks the distributable reserves to pay a dividend or buy back shares. Two resolutions are being tabled at the AGM to receive shareholder approval to facilitate this. The method of returning cash to shareholders has yet to be determined but it will take place once the company receives its second tranche of $75m from Samsung in February 2024.

Healthy balance sheet to execute growth strategy

In retaining £20m, Nanoco will have a healthy balance sheet to execute its growth strategy, with capital being deployed in R&D, commercial activities and a proactive IP licensing programme, as well as paying off debt (c £5m) and working capital. The board has recently completed a review of its addressable markets in sensing and display as well as the potential value opportunities for its IP. In sensing, a catalyst would be news on the first of Nanoco’s multiple end-customer trials moving to commercial production. The proliferation of sensors in devices such as mobile handsets, cars, VR headsets, etc, creates an attractive opportunity, in our view. Management is also hoping to further monetise its IP, having identified several potentially infringing third parties and has created a team to pursue them. The company is also seeing renewed interest in its display materials, off the back of the Samsung settlement.

Valuation: Strong IP to drive upside

We will introduce estimates for FY24 when we have more news on how end-customer trials are progressing with Nanoco’s lead partner. However, given the pipeline of opportunities discussed above, we believe management’s target of reaching a self-financing position during FY25 is eminently achievable. Nanoco is valued at less than our estimated year-end FY23 net cash balance (£5.3m) plus the remaining $75m (c £58.7m) to be received from Samsung. This seems too low given the potential of the company’s technology and its IP position.

Exhibit 1: 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

6.0*

Cost of Sales

(0.3)

(0.2)

(0.4)

(0.6)

Gross Profit

3.5

1.9

2.0

5.4

EBITDA

 

 

(2.9)

(2.8)

(2.1)

0.5

Operating profit (before amort. and excepts.)

 

 

(4.8)

(4.6)

(4.2)

(0.3)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.7)

0.0

0.0

19.8**

Share-based payments

(0.4)

(0.4)

(0.6)

(0.7)

Reported operating profit

(5.9)

(5.0)

(4.8)

18.8

Net Interest

(0.1)

(0.1)

(0.5)

(0.5)

Exceptionals

0.0

0.0

0.0

(4.7)

Profit Before Tax (norm)

 

 

(4.9)

(4.7)

(4.6)

(0.8)

Profit Before Tax (reported)

 

 

(6.0)

(5.1)

(5.2)

13.6

Reported tax

0.9

0.7

0.5

0.0

Profit After Tax (norm)

(4.0)

(4.0)

(4.1)

(0.8)

Profit After Tax (reported)

(5.1)

(4.4)

(4.7)

13.6

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(4.0)

(4.0)

(4.1)

(0.8)

Net income (reported)

(5.1)

(4.4)

(4.7)

13.6

Average Number of Shares Outstanding (m)

287

306

308

322

EPS - normalised (p)

 

 

(1.39)

(1.30)

(1.32)

(0.26)

EPS - normalised fully diluted (p)

 

 

(1.39)

(1.30)

(1.32)

(0.26)

EPS - basic reported (p)

 

 

(1.77)

(1.44)

(1.52)

4.21

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

4.6

3.4

1.8

0.6

Intangible Assets

3.7

2.9

1.6

0.6

Tangible Assets

0.9

0.5

0.2

0.0

Deferred income

0.0

0.0

0.0

0.0

Current Assets

 

 

7.2

5.8

9.0

75.9

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

9.2

Other (including proceeds from settlement receivable in FY24)

0.9

0.7

0.5

65.3

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 (including deferred licence income)

(0.6)

(0.3)

(0.7)

(0.7)

Long Term Liabilities

 

 

(1.3)

(3.8)

(4.0)

(48.8)

Long term financial leases

(0.5)

(0.1)

(0.0)

(0.0)

Loan notes

(0.5)

(3.5)

(3.9)

(3.9)

Other (including deferred licence income)

(0.2)

(0.1)

(0.1)

(44.8)

Net Assets

 

 

7.0

3.1

4.3

25.4

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

7.0

3.1

4.3

25.4

CASH FLOW

Operating Cash Flow

(3.0)

(2.8)

(2.3)

0.5

Working capital

(1.4)

(1.4)

0.1

0.3

Exceptional & other

(0.8)

(0.1)

(0.2)

0.0

Tax

1.1

0.9

0.7

0.0

Net Operating Cash Flow

 

 

(4.1)

(3.5)

(1.8)

0.8

Capex

(0.7)

(0.3)

(0.1)

(0.0)

Net proceeds from Samsung settlement

0.0

0.0

0.0

4.5

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)

(2.7)

Net Cash Flow

(2.4)

(1.5)

2.9

2.5

Opening net debt/(cash)

 

 

(6.6)

(4.7)

(0.3)

(2.8)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.6

(3.0)

(0.4)

0.0

Closing net debt/(cash)

 

 

(4.7)

(0.3)

(2.8)

(5.3)

Source: Company accounts, Edison Investment Research. Note: *Including £3.0m licence revenue from Samsung. **£70.0m profit on disposal of IP netted against £50.2m litigation costs.

General disclaimer and copyright

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 2023 Edison Investment Research Limited (Edison).

Australia

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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 2023 Edison Investment Research Limited (Edison).

Australia

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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