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Research: TMT
Nanoco has signed an agreement for a fifth work package from its major European customer. This covers the final phase of a scale-up of a longer wavelength material and development of a third material. It has also completed a placing and subscription raising £2.0m (net) at 37p/share, which extends the cash runway into CY24, and announced a broker option at 37p/share potentially raising up to an additional £3.7m.
Nanoco Group |
More good news – this time organic business |
Contract award and fundraising |
Tech hardware and equipment |
7 June 2022 |
Share price performance
Business description
Next event
Analysts
Nanoco Group is a research client of Edison Investment Research Limited |
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Nanoco has signed an agreement for a fifth work package from its major European customer. This covers the final phase of a scale-up of a longer wavelength material and development of a third material. It has also completed a placing and subscription raising £2.0m (net) at 37p/share, which extends the cash runway into CY24, and announced a broker option at 37p/share potentially raising up to an additional £3.7m.
Year end |
Revenue |
EBITDA |
PBT* |
EPS |
DPS |
P/E (x) |
07/20 |
3.9 |
(2.9) |
(4.9) |
(1.39) |
0.00 |
N/A |
07/21 |
2.1 |
(2.9) |
(4.7) |
(1.30) |
0.00 |
N/A |
07/22e |
2.4 |
(2.6) |
(4.4) |
(1.24) |
0.00 |
N/A |
07/23e** |
2.4 |
(2.7) |
(3.7) |
(1.00) |
0.00 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding potential production orders.
Work package provides stable revenue base
This fifth work package gives a monthly revenue rate similar to that delivered in H122, so we have raised our FY22 revenue estimate by £0.2m to £2.4m. Importantly, while the four previous work packages have lasted one or two quarters, this fifth work package extends for one year starting May 2022, giving Nanoco a more stable environment for business planning. The working capital arrangements in the contract enable Nanoco to set up a robust raw material supply chain ahead of commercial production orders, which it expects to have visibility of during H2 CY22. The inclusion of development work on a third material emphasises the long-term nature of the relationship with the customer, which we have previously inferred is ST Microelectronics (ST).
Cash runway potentially extended into CY24
The fifth work package, together with the placing and subscription, extends Nanoco’s cash runway from H1 CY23, by which point management expects to have visibility of both potential production orders and the outcome of the patent litigation trial with Samsung, into CY24. It means Nanoco has sufficient cash if the litigation process is prolonged by appeals because if the initial application for sensing materials is relatively low volume, Nanoco will not reach cash break-even until FY25.
Valuation: Dependent on patent litigation outcome
Ahead of the programme with ST moving to commercial production, we believe much of Nanoco’s value still lies in a satisfactory resolution of the patent infringement dispute with Samsung, an event which 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.
Revisions to estimates
Minor upgrades to FY22 estimates
We have made the following changes to our FY22 estimates:
Revenues: management notes that the new work package delivers a monthly run-rate equivalent to that delivered in H122, when revenues, most of which were attributable to ST, totalled £1.1m. Since Nanoco received new orders from its major Asian customer in Q322 and is at an advanced stage of discussion regarding additional development work packages with the customer, we expect H222 revenues to be higher than H122 and therefore raise our revenue estimate slightly, by £0.2m to £2.4m. This follows another minor upgrade in March.
Administrative costs: we reduce administrative costs by £0.2m to reflect tight cost management.
EPS: we modify our estimates to include the new shares issues following the placing and subscription but exclude any potential shares attributable to the broker option. We note that the Broker Option is not materially dilutive because the total fundraise including the placing and subscription will not exceed 5% of the company’s issued share capital immediately prior to the fundraise.
Cash flow: we modify our cash flow to include the £2.0m (net) from the placing and subscription but exclude any potential cash from the broker option. The broker option closes at 5.00pm on 7 June 2022. We note that long-term shareholder Lombard Odier Asset Management remains supportive but did not participate in the current fund-raising because it did not want to risk exceeding a 30% stake.
Introducing FY23 estimates
Since the fifth work-package from ST extends to end April 2023, there is sufficient visibility to introduce estimates for FY23. These do not include any revenues attributable to the commercial production of nano-materials for sensing or other applications. We note that, if inflationary effects were excluded, the cost savings arising from exiting the surplus facility in Manchester and other actions would reduce the annualised cost base by around 15% by January 2023 compared with management’s expectations for FY22.
Exhibit 1: Changes to FY22 estimates and introduction of FY23 estimates
Year end 31 July |
FY21 |
FY22e |
FY23e |
|||
£m |
Actual |
New |
Old |
% change |
New |
|
Revenues |
2.1 |
2.4 |
2.2 |
9.1% |
2.4 |
|
Gross profit |
1.9 |
2.2 |
2.0 |
9.3% |
2.2 |
|
EBITDA |
(2.9) |
(2.6) |
(3.0) |
N/A |
(2.7) |
|
Normalised PBT |
(4.7) |
(4.4) |
(4.8) |
N/A |
(3.7) |
|
Normalised net income |
(4.0) |
(3.8) |
(4.2) |
N/A |
(3.1) |
|
Normalised diluted EPS (p) |
(1.3) |
(1.2) |
(1.4) |
N/A |
(1.0) |
|
Net debt/(cash) |
(0.3) |
(0.3) |
2.2 |
N/A |
2.3 |
|
Source: Edison Investment Research
Cash break-even in FY24 or FY25, depending on initial sensing application
Management expects that cost saving measures will reduce the company’s annualised cost base to c £4.0m by January 2023, resulting in a cash break-even revenue figure of c £5.0m. The litigation costs are being funded by a third party, so are not a drain on cash. When the group reaches cash break-even will depend on what application the first commercial volumes of nano-materials are made for. ST is engaged with many customers that could potentially deploy sensing chips incorporating Nanoco’s material. Deployment by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues working a single five-day shift, potentially enabling Nanoco to reach cash break-even in FY24. Deployment in a more niche application, such as virtual reality (VR) glasses, would generate lower revenues, but would be likely to catalyse take-up by other customers, potentially enabling Nanoco to reach break-even in FY25. Longer-term, the existing production capacity in Runcorn could generate sensing application revenues of £100m/year working 24/7.
Realising value from patent litigation
Until the development programmes with ST or other customers definitely move to commercial production, we believe that most of Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung, which Nanoco instigated in February 2020.
|
Exhibit 2: Samsung litigation timeline |
|
|
Source: Edison Investment Research |
Nanoco received a final decision on the validity of the patents in May 2022. The PTAB determined in favour of Nanoco in respect of all 47 claims in the five patents. Nanoco’s IP infringement case had been put on hold, awaiting the PTAB decision. Now that is out of the way, management expects that the court hearing, which will focus on infringement and damages, is likely to take place in calendar Q422. Samsung has the right to appeal the verdict of both the PTAB decision and of the infringement case, if Nanoco is successful. If this were to happen, then the process could potentially last several more years. However, it is possible that the unequivocal nature of the PTAB’s verdict could make Samsung more receptive to entering negotiations.
Nanoco estimates that between April 2015 and the present Samsung has sold more than 14m TVs deploying QDs based on Nanoco IP in the United States, which represents around one-third of its global sales. While Nanoco has not revealed its estimates of the potential payout if the litigation is successful, it has disclosed three possible damages models for calculating the value of the lost revenue to Nanoco:
■
Top end: damages based on the premise that Samsung’s QD TV market in the United States is wholly enabled by Nanoco’s QD technology, so the value of the lost revenue would be derived from the total value of that market.
■
Mid: damages based on the premise that the QD-enabled display is a high proportion of the additional value of a QD-enhanced TV compared with a standard TV.
■
Low end: damages based on the value only of the QD film in the displays.
There are further options as well. Applying the low-end valuation model, we assume the QD-enhanced TVs had an average sales price of US$2,200–2,500 compared with the average price of a top of the range TV without QDs of c US$1,000. Had the alleged patent infringement not taken place, we believe that the volumes of QDs Samsung required would have been higher than Nanoco could have produced in Runcorn, so it would have licensed its technology to partners, primarily Dow Chemical, and would have received significant royalties. If we assume that the cost of the QDs in each TV is equivalent to 10% of the uplift in price between QD and non-QD TV displays, and that Nanoco would have received a 12% royalty (as per our May 2017 initiation note) on these QDs, this represents US$14.4–18.0 in lost revenue per TV display or US$200–250m between April 2015 and the present in the United States alone.
A damages award may also make an additional allowance for future sales of infringing TVs and a possible uplift of up to three times for wilfulness. While the ongoing litigation only covers the United States, we understand that Samsung would also be likely to seek a global negotiated settlement covering sales in other territories. Nanoco would retain 50–80% of the award, depending on its magnitude, and would have to pay UK corporation tax on the amount received, which could be offset against £36m losses.
Exhibit 2: Financial summary
£'m |
2020 |
2021 |
2022e |
2023e |
||
31-July |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
restated |
|||||
Revenue |
|
|
3.9 |
2.1 |
2.4 |
2.4 |
Cost of Sales |
(0.3) |
(0.2) |
(0.2) |
(0.2) |
||
Gross Profit |
3.5 |
1.9 |
2.2 |
2.2 |
||
EBITDA |
|
|
(2.9) |
(2.9) |
(2.6) |
(2.7) |
Operating profit (before amort. and excepts). |
|
(4.8) |
(4.6) |
(3.9) |
(3.6) |
|
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) |
(0.7) |
(0.7) |
||
Reported operating profit |
(5.9) |
(5.0) |
(4.6) |
(4.3) |
||
Net Interest |
(0.1) |
(0.1) |
(0.5) |
(0.1) |
||
Profit Before Tax (norm) |
|
|
(4.9) |
(4.7) |
(4.4) |
(3.7) |
Profit Before Tax (reported) |
|
|
(6.0) |
(5.1) |
(5.1) |
(4.4) |
Reported tax |
0.9 |
0.7 |
0.6 |
0.6 |
||
Profit After Tax (norm) |
(4.0) |
(4.0) |
(3.8) |
(3.1) |
||
Profit After Tax (reported) |
(5.1) |
(4.4) |
(4.5) |
(3.8) |
||
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
(4.0) |
(4.0) |
(3.8) |
(3.1) |
||
Net income (reported) |
(5.1) |
(4.4) |
(4.5) |
(3.8) |
||
Average Number of Shares Outstanding (m) |
287 |
306 |
308 |
313 |
||
EPS - normalised (p) |
|
|
(1.39) |
(1.30) |
(1.24) |
(1.00) |
EPS - normalised fully diluted (p) |
|
|
(1.39) |
(1.30) |
(1.24) |
(1.00) |
EPS - basic reported (p) |
|
|
(1.77) |
(1.44) |
(1.46) |
(1.22) |
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
4.6 |
3.4 |
3.0 |
2.5 |
Intangible Assets |
3.7 |
2.9 |
2.6 |
2.4 |
||
Tangible Assets |
0.9 |
0.5 |
0.4 |
0.1 |
||
Investments & other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
7.2 |
5.8 |
5.3 |
2.7 |
Stocks |
0.1 |
0.1 |
0.1 |
0.1 |
||
Debtors |
1.0 |
1.2 |
0.7 |
0.7 |
||
Cash & cash equivalents |
5.2 |
3.8 |
3.7 |
1.1 |
||
Other |
0.9 |
0.7 |
0.7 |
0.7 |
||
Current Liabilities |
|
|
(3.6) |
(2.4) |
(2.2) |
(2.2) |
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) |
(0.5) |
(0.5) |
||
Short term bank debt |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(0.6) |
(0.3) |
(0.3) |
(0.3) |
||
Long Term Liabilities |
|
|
(1.3) |
(3.8) |
(4.3) |
(4.3) |
Long term financial leases |
(0.5) |
(0.1) |
(0.6) |
(0.6) |
||
Loan notes |
(0.5) |
(3.5) |
(3.5) |
(3.5) |
||
Other long term liabilities |
(0.2) |
(0.1) |
(0.1) |
(0.1) |
||
Net Assets |
|
|
7.0 |
3.1 |
1.7 |
(1.4) |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
7.0 |
3.1 |
1.7 |
(1.4) |
CASH FLOW |
||||||
Operating Cash Flow |
(3.0) |
(2.8) |
(2.6) |
(2.7) |
||
Working capital |
(1.4) |
(1.4) |
0.3 |
0.0 |
||
Exceptional & other |
(0.8) |
(0.1) |
0.0 |
0.0 |
||
Tax |
1.1 |
0.9 |
0.7 |
0.7 |
||
Net Operating Cash Flow |
|
|
(4.1) |
(3.5) |
(1.5) |
(2.0) |
Capex |
(0.7) |
(0.3) |
(0.4) |
(0.4) |
||
Acquisitions/disposals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net interest |
0.0 |
(0.0) |
(0.1) |
(0.1) |
||
Equity financing |
3.2 |
0.0 |
2.1 |
0.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(0.8) |
2.3 |
0.0 |
0.0 |
||
Net Cash Flow |
(2.4) |
(1.5) |
0.0 |
(2.5) |
||
Opening net debt/(cash) excluding finance leases |
|
|
(6.6) |
(4.7) |
(0.3) |
(0.3) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
0.6 |
(3.0) |
0.0 |
0.0 |
||
Closing net debt/(cash) excluding finance leases |
|
|
(4.7) |
(0.3) |
(0.3) |
2.3 |
Source: Edison Investment Research
|
|
Research: Healthcare
Newron Phamaceuticals has announced encouraging interim safety and efficacy data for the use of evenamide, a glutamate modulator, as an add-on therapy in treatment-resistant schizophrenia (TRS). Data from the first 100 patients who completed the six-week open-label study 014 (assessing the drug candidate as an add-on in moderate-to-severe TRS) found it improved symptoms of psychosis. A high proportion (77%) of all treated patients responded to their antipsychotic (AP) therapy after the addition of evenamide (dosed at 7.5mg, 15mg or 30mg twice daily). The drug was well tolerated in combination with all APs tested. We see these data as further support for the glutamate hypothesis of schizophrenia and, by extension, management’s approach to treating the disease. Considering this news, we are reviewing our estimates.
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