Agronomics — Bright outlook for top investor in revolutionary sector

Agronomics invests in companies producing environmentally friendly alternatives to traditionally produced meat, dairy, seafood, leather, cotton, proteins and other products, via cellular agriculture (Exhibit 1 provides a full list of the company’s 21 portfolio holdings). ANIC’s chairman, Richard Reed is very positive about the outlook for this sector. He views the next 12 months as pivotal, as US regulators are expected to approve the sale of several cultivated meat products. China has also recently announced its five-year agricultural plan, which refers to cultivated meat for the first time.

Reed is equally upbeat about ANIC’s prospects in the near and longer term. He says the company is expecting ‘significant developments’ in a number of its portfolio companies that should positively impact their valuation in coming months. And looking further ahead, he believes the current investment portfolio shows ‘considerable promise for future growth, given the scale of opportunity to invest in the nascent alternative foods sector’.

ANIC’s advisory team continues its efforts to enhance this positive outlook and create greater value for shareholders, by seeking new investment opportunities. The company has made several key announcements since the publication of our initiation report in January 2022. In February 2022, it acquired a 2.05% share in Geltor, a precision fermentation company focused on producing designer proteins for use in the cosmetic industry, as well as in food and beverage production. Geltor’s intention is to develop ingredients that can replace traditional animal-derived proteins, including collagen. ANIC acquired this position from an existing shareholder for US$9.5m, which equates to a portfolio weighting of 5.0%, based on the latest reported NAV. The acquisition was funded by US$6.8m cash, combined with the issuance of 8.7m new ordinary shares worth a total of US$2.7m in value. These shares are subject to a lock-in and orderly market agreement, with a vesting schedule comprising three tranches stretching over the next two years.

ANIC has also announced a €6.9m investment in Onego Bio, as part of a €10m seed fundraising round. This investment was funded by cash and will give ANIC a 19.94% equity stake in Onego Bio and the right to a board seat. The holding represents 4.21% of ANIC’s portfolio, based on the last NAV. Onego Bio is developing sustainable and animal-free egg protein, with the aim of solving the environmental and animal welfare problems associated with egg production. The company is a spin-off from VTT Technical Research Centre of Finland, one of Europe’s leading research institutions.

Onego Bio was founded in 2021 and is yet to generate revenue, incur significant costs or report its net assets, but Anthony Chow, a member of ANIC’s advisory team, considers it one of the company’s ‘most exciting’ holdings. He argues that investments in precision fermentation broaden and diversify the portfolio away from cultivated meats. Perhaps more importantly, products using fermentation technology are more advanced than the development of cultivated meats, and thus closer to realising commercial viability. Onego Bio shares the same fermentation technology as Perfect Day, the animal and dairy protein producer whose products are now being trialled in Starbucks’ cafes in Seattle, in the United States. This means the regulatory framework faced by Onego Bio’s products is well defined and they are expected to be on the market in about 18 months.

Most recently, Agronomics announced its first joint venture, launching Good Dog Food with joint venture partner, Roslin Technologies, a food biotechnology company. Good Dog Food will develop a range of eco-friendly pet food products made using cultivated meat. Roslin Technologies is partly owned by the University of Edinburgh and has preferential intellectual property rights from Roslin Institute, which is famous for Dolly the sheep, the world’s first cloned adult mammal. The seed funding (less than £1m) ANIC has provided for this joint venture is its first investment in a UK-based cultivated meat company. Jim Mellon will chair Good Dog Food’s board.

ANIC’s new investments in Geltor, Onego Bio and Good Dog Food take the number of its portfolio holdings to 21 (Exhibit 1). In addition, it has previously disclosed an interest in investing in several other projects, with more announcements on these projects expected in due course.

Agronomics has also made follow-on investments in some of its existing portfolio holdings. Earlier this month, it co-led the Series A financing for SuperMeat, with an additional cash investment of US$10m that gives it a 7.77% equity stake in the company (up from 2.2% previously), along with the right to a board seat. ANIC will carry the aggregate position in its accounts at a book value of US$19.35m, subject to audit, including an unrealised gain of US$6.95m. This valuation means the company’s SuperMeat position will represent approximately 10% of its NAV.

SuperMeat is a leading cultivated chicken meat company, based in Israel. In a taste test in January 2022, a panel of culinary experts judged SuperMeat’s unseasoned chicken to be indistinguishable to conventional chicken. The company is seeking regulatory approval in the United States and Singapore for its chicken to be used in consumer products. SuperMeat intends to use the Series A financing to establish its first production facility, on the expectation it will be able to market its chicken products within the next 24 months.

ANIC’s follow-on investment in SuperMeat is its largest transaction to date, and its new investment in Geltor is almost as large. Larger investments appeal to Chow, because they have the advantage of providing ANIC with the means to have a greater impact on the development of their portfolio holdings, via board seats and voting rights. This trend towards larger investments also reflects the fact that ANIC has cash available to invest thanks to capital raisings conducted in May and December 2021 (see initiation note for details).

Agronomics made another, smaller follow-on investment in March, providing a further US$1m cash to GALY, an existing portfolio holding focused on plant cell culture. This company possesses disruptive technology for growing cotton from cells in a laboratory, rather than using traditional soil-based, water- and pesticide-intensive farming methods. The additional investment gives ANIC a 4.11% equity stake in GALY, which it will carry at a book value of US$3.47m (unaudited), representing an unrealised gain of US$1.97m. The holding will account for approximately 1.82% of NAV.

The other significant news on ANIC’s portfolio holdings since the publication of our initiation report relates to BlueNalu, a producer of cultivated seafood, focused on bluefin tuna. ANIC holds 5.85% of equity in this company, a position which represents 4.8% of ANIC’s portfolio on an NAV basis. In January 2022, BlueNalu agreed a partnership with Food & Life Companies, to supply leading sushi brands such as Sushiro and Kyotaru with BueNalu’s lead product, cultivated bluefin tuna.

Agronomics is a relatively new investment vehicle. It adopted its current investment strategy in April 2019. Early performance has been positive. The company reports its NAV quarterly and the latest available NAV, for the period ended 31 December 2021, is 14.32p per share, up from 12.99 at end September 2021. This represents an increase of 10.24% over the quarter, 157.6% over the 12 months to end December 2021 and 69.1% since April 2019.

Net assets increased to £134.3m at end December 2021, from £103.9m at end September 2021, including cash and cash equivalents of £45.3m (versus £55.1m in September). The increase in the NAV over the quarter was mainly due to a fundraising round in December 2021, which raised total funds of £31.0m and resulted in the issue of 138.4m new ordinary shares. The NAV also benefited from unrealised gains on the revaluation of investments held in VitroLabs, a US-based cultivated leather producer (£1.8m) and GALY, a lab-grown cotton producer discussed above (£1.5m).

Announcements since the end of December relating to a total of US$8.92m of unrealised gains in SuperMeat (US$6.95m) and GALY (US$1.97m) (discussed above) mean ANIC’s NAV will rise further during the current quarter. And, as we outlined in our initiation report, we see scope for further significant NAV increases, as ANIC’s portfolio holdings progress towards commercial viability.

Increases in Agronomics’ share price have outpaced the rise in its NAV. Since the adoption of its current investment strategy in April 2019, ANIC’s shares are up over 300%. However, the share price has been under pressure in recent months, declining by around 40% since early November 2021. Several adverse influences have been at work, but none related specifically to ANIC’s portfolio holdings. For one, investors have begun to reassess very high valuations in the broader alternative protein sector. For example, the sector’s ‘poster child’, the plant-based protein producer Beyond Meat, has seen a dramatic fall in its share price over the past year, following disappointing sales and earnings. Investors may also be losing patience with the lengthy wait for regulatory approval for some alternative protein products. For instance, US regulatory approval for BlueNalu’s cultivated seafood is widely anticipated and considered imminent, but it has not yet been forthcoming. Chow cites a recent survey by Nielsen, a consumer data company, as a further possible dampener on market confidence in the outlook for alternative, plant-based meat products. The survey showed a 3% reduction in sales of these products in December 2021.

Chow also believes the outbreak of war in Ukraine has adversely affected ANIC’s share price. As usual in times of uncertainty, investors scrambled for cash and other safe-haven assets, and some funds that hold ANIC shares have been hit by redemptions. It appears these funds have sold ANIC’s relatively liquid shares to meet their liquidity requirements. In Chow’s view, the confluence of these events has resulted in ANIC’s shares offering ‘very good value’ at current levels.

ANIC’s share price usually trades at a substantial premium to its cum-income NAV. The premium peaked at around 500% in May 2021, but has since narrowed dramatically, in part due to the issuance of new shares, and as a result of the recent share price decline discussed above. Based on the current share price and the end December NAV, ANIC’s share price is presently trading at a premium of 31.3% (Exhibit 6).

However, several factors should provide underlying support for ANIC’s share price and hence its premium. These include the company’s conservative, ‘backward-looking’ valuation policy, which has the effect of limiting NAV uplifts (as discussed in our initiation report). ANIC’s shares also possess scarcity value, as it is the only UK-listed investment vehicle targeting cellular agriculture, and investor interest in the broader sector is growing rapidly as alternative protein products prove their commercial viability.

While renewed upward pressure on the premium will be limited by future NAV uplifts and by further rounds of equity issuance as ANIC seeks to meet its funding requirements, these supportive factors suggest ANIC’s premium may not remain at its current, relatively narrow level indefinitely. But while it does, it may provide investors with the opportunity to gain exposure to this growing, game-changing sector at a particularly attractive price.