Nanoco — Visibility pushed back

Nanoco Group (LSE: NANO)

Last close As at 19/07/2024

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Market capitalisation

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Research: TMT

Nanoco — Visibility pushed back

Nanoco Group’s trading update flagged that, while its development work on second-generation materials continues to progress as expected, it does not expect to receive a follow-on order for commercial materials in FY24. These orders were expected to be low volume, hence the delay is not particularly material from a financial perspective, although it does remove an expected milestone to gauge Nanoco’s pathway to volume production. We have adjusted our estimates to reflect a more cautious scenario for the near-term ramp-up of volume material sales. Success will be defined by the extent to which Nanoco-based sensors are designed into handsets and other devices in the 2026/27 timeframe, when the infrared sensing market is expected to see an inflection. Nanoco and its lead partner hope to have more visibility on end-customers’ commercialisation pipelines by the time of the FY24 results in October.

Written by

Dan Ridsdale

Head of Technology

TMT

Nanoco Group

Visibility pushed back

Trading update

Tech hardware and equipment

4 July 2024

Price

14.04p

Market cap

£27m

Estimated net cash (£m) at FY24

20.0

Shares in issue (excluding 13.8m shares held in treasury)

192m

Free float

84.2%

Code

NANO, NNOCF

Primary exchange

LSE

Secondary exchange

OTC

Share price performance

%

1m

3m

12m

Abs

(19.1)

(35.6)

(22.0)

Rel (local)

(18.1)

(37.6)

(28.4)

52-week high/low

23.40p

14.04p

Business description

Nanoco Group is a global leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials for high-volume use cases. Focus applications are sensors and display.

Next events

FY24 results

October 2024

Analyst

Dan Ridsdale

+44 (0)20 3077 5700

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco Group’s trading update flagged that, while its development work on second-generation materials continues to progress as expected, it does not expect to receive a follow-on order for commercial materials in FY24. These orders were expected to be low volume, hence the delay is not particularly material from a financial perspective, although it does remove an expected milestone to gauge Nanoco’s pathway to volume production. We have adjusted our estimates to reflect a more cautious scenario for the near-term ramp-up of volume material sales. Success will be defined by the extent to which Nanoco-based sensors are designed into handsets and other devices in the 2026/27 timeframe, when the infrared sensing market is expected to see an inflection. Nanoco and its lead partner hope to have more visibility on end-customers’ commercialisation pipelines by the time of the FY24 results in October.

Year end

Revenue* (£m)

EBITDA*
(£m)

EPS*
(p)

Net cash
(£m)

EV/sales
(x)

P/E
(x)

07/22

2.5

(2.1)

(1.3)

2.8

3.6

N/A

07/23

5.6

(0.5)

(0.7)

3.6

1.6

N/A

07/24e

7.9

0.5

(0.3)

20.0

1.1

N/A

07/25e

9.4

1.5

0.4

15.2

0.9

35.1

Note: *Revenue, EBITDA and EPS include £6m annual Samsung licence revenue, drawn from deferred income. EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

No follow-on order in FY24, development on track

The main news in the trading update was that management no longer expects to receive a follow-on (albeit low-volume) commercial order in FY24, although the reason for this development is currently unclear. Nanoco continues to develop secondgeneration infrared sensing materials with STMicroelectronics and an Asian chemicals company. The company’s device fabrication facility, a key investment and made to accelerate development cycles, is now fully operational and Nanoco has shipped the first sample devices to its partners and clients. On the display side, Nanoco continues to work on small-scale developments with customers, but a new anchor partner has not been secured yet.

Cautionary trim to estimates but FY26/27 is key

We lower our FY24 revenues from £8.3m to £7.9m leaving EBITDA and year end net cash unchanged, but lower our FY25 revenue and EBITDA on a precautionary basis, due to the absence of this expected milestone. Ultimately, success will be defined by the extent to which Nanoco-based sensors are designed into handsets and other devices in the 2026/27 timeframe, with lead indicators on this front likely to be the key catalyst for the share price in the short-to-medium term.

Valuation: Range unchanged, visibility impaired

Given the expected £20m net cash position at year end, the 28% fall in the share price following the trading update equates to a c 60% decrease in enterprise value to £6.9m. While visibility has not improved, as expected, the upside potential is unchanged. We believe Nanoco’s intellectual property, expertise, manufacturing and test capability, and customer relationships, backed by the strong balance sheet and low-cost model, provide strategic value for downside protection.

Changes in estimates

Our estimate changes are detailed below. Management expects FY24 revenues to be slightly below consensus, with EBITDA at the lower end and net cash remaining at £20m (matching our estimate of £20m). As Edison was at the low end of consensus, we pare back our FY24 revenues from £8.3m to £7.9m, but leave EBITDA and net cash unchanged. We lower our FY25 estimates on a cautionary basis, to reflect the absence of the milestone.

Given that Nanoco’s financial returns will be determined by events beyond our forecast period, we believe these changes are material to the investment case. The implications of the lack of follow-on order for commercial material in FY24 are impossible to gauge at this stage, although the absence of an expected milestone clearly reduces visibility. Nanoco and its lead partner hope to have more clarity on end-customers’ commercialisation pipelines by the time of the FY24 results in October.

Exhibit 1: Estimate changes

£m

FY23

FY24e

FY25e

Actual

Old

New

Change

Old

New

Change

Revenues

5.6

8.3

7.9

-4%

10.3

9.4

-9%

EBITDA

(0.5)

0.5

0.5

-5%

2.2

1.5

-32%

Reported operating profit

15.0

1.1

1.1

-2%

0.4

(0.3)

-182%

Reported operating margin

267%

14%

14%

4%

-3%

Normalised net income

(2.1)

(0.7)

(0.7)

4%

1.7

1.0

-41%

Normalised diluted EPS (p)

(0.66)

(0.25)

(0.26)

4%

0.60

0.35

-41%

Net debt/(cash)

(3.6)

(20.0)

(20.0)

0%

(17.0)

(15.2)

-11%

Cash

8.2

20.0

20.0

0%

17.0

15.2

-11%

Debt

(4.6)

0.0

0.0

0.0

0.0

Source: Nanoco accounts, Edison Investment Research

Exhibit 2: Financial summary

£m

2022

2023

2024e

2025e

Year end 31 July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

2.5

5.6

7.9

9.4

Cost of Sales

(0.9)

(0.8)

(0.4)

(0.6)

Gross Profit

1.5

4.8

7.5

8.8

EBITDA

 

 

(2.1)

(0.5)

0.5

1.5

Operating profit (before amort. and excepts.)

 

 

(4.2)

(2.9)

(0.4)

0.6

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

0.0

18.9

2.5

0.0

Share-based payments

(0.6)

(1.0)

(1.0)

(1.0)

Reported operating profit

(4.8)

15.0

1.1

(0.3)

Net Interest

(0.5)

(0.7)

0.2

0.7

Exceptionals

0.0

(4.7)

0.0

0.0

Profit Before Tax (norm)

 

 

(4.6)

(3.6)

(0.2)

1.3

Profit Before Tax (reported)

 

 

(5.2)

9.6

1.3

0.4

Reported tax

0.5

1.5

(0.5)

(0.3)

Profit After Tax (norm)

(4.1)

(2.1)

(0.7)

1.0

Profit After Tax (reported)

(4.7)

11.1

0.8

0.1

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(4.1)

(2.1)

(0.7)

1.0

Net income (reported)

(4.7)

11.1

0.8

0.1

Average Number of Shares Outstanding (m)

308

322

278

290

EPS - normalised (p)

 

 

(1.32)

(0.66)

(0.26)

0.35

EPS - normalised fully diluted (p)

 

 

(1.32)

(0.66)

(0.26)

0.35

EPS - basic reported (p)

 

 

(1.52)

3.44

0.29

0.03

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

1.8

7.7

8.6

8.0

Intangible Assets

1.6

1.0

0.8

0.6

Tangible Assets

0.2

2.4

3.5

3.1

Deferred income

0.0

4.3

4.3

4.3

Other

0.0

1.8

1.8

1.8

Current Assets

 

 

9.0

43.1

23.3

19.0

Stocks

0.2

0.3

0.7

0.9

Debtors

1.5

34.0

2.1

2.3

Cash & cash equivalents

6.8

8.2

20.0

15.2

Other (including proceeds from settlement receivable in FY24)

0.5

0.6

0.6

0.6

Current Liabilities

 

 

(2.4)

(14.0)

(9.0)

(9.0)

Creditors

(1.5)

(2.6)

(1.6)

(1.6)

Tax and social security

0.0

(0.8)

(0.8)

(0.8)

Short term financial leases

(0.2)

(0.5)

(0.5)

(0.5)

Short term bank debt

0.0

(4.0)

0.0

0.0

Other (including deferred licence income)

(0.7)

(6.1)

(6.1)

(6.1)

Long-term Liabilities

 

 

(4.0)

(20.2)

(38.6)

(32.6)

Long-term financial leases

(0.0)

(1.4)

(0.7)

(0.7)

Loan notes

(3.9)

(0.6)

0.0

0.0

Other (including deferred licence income)

(0.1)

(18.2)

(38.0)

(32.0)

Net Assets

 

 

4.3

16.6

(15.7)

(14.7)

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

4.3

16.6

(15.7)

(14.7)

CASH FLOW

Operating Cash Flow

(2.3)

(0.4)

0.5

1.5

Working capital

0.1

24.5

50.2

(6.5)

Exceptional & other

(0.2)

(47.5)

2.5

0.0

Tax

0.7

(4.2)

0.0

(0.3)

Net Operating Cash Flow

 

 

(1.8)

(27.6)

53.2

(5.2)

Capex

(0.1)

(0.4)

(2.1)

(0.5)

Net proceeds from Samsung settlement

0.0

34.5

0.0

0.0

Net interest

(0.0)

(4.7)

0.4

0.9

Equity financing

5.4

0.0

(34.5)

0.0

Dividends

0.0

0.0

0.0

0.0

Other

(0.6)

(0.5)

0.0

0.0

Net Cash Flow

2.9

1.3

17.1

(4.8)

Opening net debt/(cash)

 

 

(0.3)

(2.8)

(3.6)

(20.0)

FX

0.0

0.2

0.1

0.0

Other non-cash movements

(0.4)

(0.6)

(0.8)

0.0

Closing net debt/(cash)

 

 

(2.8)

(3.6)

(20.0)

(15.2)

Source: Company data, Edison Investment Research

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 2024 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 2024 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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