Nanoco Group — Delays but visibility of move to volume production

Nanoco Group (LSE: NANO)

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Research: TMT

Nanoco Group — Delays but visibility of move to volume production

While the pathway to commercial shipments is taking longer than anticipated, we now have better visibility that an inflection is set to happen. The first Nanoco displays are due for public launch this Christmas season. The first low volume shipments of Nano-materials to the company’s tier one US sensor partner are set to start in Q4 CY18. Successful stress testing of the new facility at Runcorn in H1 CY19 should pave the way for volume production, now anticipated for H2 CY19.

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Nanoco Group

Delays but visibility of move to volume production

Trading update

Tech hardware & equipment

15 August 2018

Price

47p

Market cap

£134m

Net cash (£m) est 31 July 2018

7.9

Shares in issue

285.9m

Free float

89.9

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.6

6.7

41.4

Rel (local)

7.4

8.2

36.5

52-week high/low

48.9p

22.5p

Business description

Nanoco is the leading commercial supplier of cadmium-free quantum dots and IP. The initial focus was on the display market, as well as lighting and medical imaging. Recently the company has partnered with a major US corporate to scale up production in advanced electronic devices.

Next events

Capital markets day

11 September

Full year results

16 October

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

Nanoco Group is a research client of Edison Investment Research Limited

While the pathway to commercial shipments is taking longer than anticipated, we now have better visibility that an inflection is set to happen. The first Nanoco displays are due for public launch this Christmas season. The first low volume shipments of Nano-materials to the company’s tier one US sensor partner are set to start in Q4 CY18. Successful stress testing of the new facility at Runcorn in H1 CY19 should pave the way for volume production, now anticipated for H2 CY19.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/Sales
(x)

P/E
(x)

07/16

0.5

(12.3)

(5.2)

0.0

194.9

N/A

07/17

1.3

(10.6)

(4.5)

0.0

73.5

N/A

07/18e

3.3

(6.9)

(2.5)

0.0

29.5

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Moving towards volume sales in sensors and display

Nanoco’s trading update confirms the design, build and commissioning of manufacturing facilities in Runcorn to support manufacture of nanomaterials for the company’s tier one US partner is progressing as planned. Small-scale shipments are expected to start in Q4 CY18, but complexities elsewhere in the supply chain mean volume shipments are now anticipated to start in H2 CY19 vs H1 previously. The doubling of manufacturing capacity at the Runcorn site to support the first agreement indicates the potential from this partnership is significant. The company did not reach commercial volume shipments in display in FY18, but we now have visibility of the first commercial shipments, with gaming monitors (manufactured by a Taiwanese display maker, using Wah Hong film) expected to ship for the FY18 festive season. While the high-end computer display market has the potential to generate useful incremental revenues, successfully penetrating the mid- to high-end TV market remains key to driving a significant inflection from this application.

Revenues below forecast but cash ahead

FY18e revenues of £3.3m were below our estimate (£4.7m) but year-end cash was higher at £10.7m (£7.4m). This is in part a result of the company not being able to recognise as high a proportion of payments from its tier one partner as anticipated. Revenues from the partner contributed £2.5m, while the £0.7m revenues from elsewhere (FY17 £1.3m) reflected the focus on the tier one customer and the slow commercialisation cycle in display.

Valuation: Opportunity and IP value still substantial

We have updated our FY18 estimates (Exhibit 1) to reflect the trading statement. While FY19 is now unlikely to benefit from volume shipments to the major customer in sensors, revenues from computer displays and the schedule of milestone and royalty payments (from the tier 1 partner and others) is anticipated to generate a significant y-o-y increase in revenues. We will introduce estimates for FY19 in a more detailed note, but anticipate a progressive improvement from here and believe both the company’s opportunity and IP value remain significant.

Estimate changes

While FY19 is now unlikely to benefit from volume shipments to the major customer in sensors, revenues from computer displays and the schedule of milestone and royalty payments (from the tier one partner and others) are anticipated to generate a significant y-o-y increase. We anticipate introducing estimates for FY19 in a more detailed research note in the next few weeks.

At this stage, we are treating the capex funding from the major partner to expand the Runcorn facility as a loan. We understand this will be paid pack through a royalty on volume shipments once they commence. Hence, our FY18e year-end net cash position is now comprised of £10.7m cash with £2.8m debt (previously no debt) relating to this structure.

Exhibit 1: Estimate changes

£m

2016e

2017e

2018e

2018e

Actual

Actual

Old

New

Change

Revenues

0.5

1.3

4.7

3.3

-29%

Gross profit

0.3

1.1

3.4

3.1

-9%

Gross margin

63%

81%

72%

93%

EBITDA

(11.2)

(9.4)

(5.5)

(6.0)

10%

EBITDA margin

nm

nm

nm

nm

Normalised operating profit

(12.5)

(10.7)

(6.6)

(7.1)

9%

Normalised operating profit margin

nm

nm

nm

nm

Normalised net income

(12.3)

(10.6)

(6.4)

(6.9)

9%

Normalised diluted EPS

(5.2)

(4.5)

(2.3)

(2.5)

9%

Net debt/(cash)

(14.5)

(5.7)

(7.4)

(7.9)

6%

Source: Company data, Edison Investment Research


Exhibit 2: Financial summary

£m

2015

2016

2017

2018e

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

2.0

0.5

1.3

3.3

Cost of Sales

(0.3)

(0.2)

(0.3)

(0.2)

Gross Profit

1.7

0.3

1.1

3.1

EBITDA

 

 

(8.1)

(11.2)

(9.4)

(6.0)

Operating profit (before amort. and except).

 

(9.5)

(12.5)

(10.7)

(7.1)

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)

(7.4)

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)

(6.9)

Profit Before Tax (reported)

 

 

(10.9)

(12.6)

(10.9)

(7.2)

Reported tax

1.9

2.0

1.8

0.0

Profit After Tax (norm)

(9.3)

(12.3)

(10.6)

(6.9)

Profit After Tax (reported)

(9.0)

(10.6)

(9.1)

(7.2)

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)

(6.9)

Net income (reported)

(9.0)

(10.6)

(9.1)

(7.2)

Basic average number of shares outstanding (m)

221

237

238

278

EPS - normalised (p)

 

 

(4.22)

(5.20)

(4.46)

(2.49)

EPS - diluted normalised (p)

 

 

(4.22)

(5.20)

(4.46)

(2.49)

EPS - basic reported (p)

 

 

(4.05)

(4.47)

(3.83)

(2.58)

Dividend per share (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/M

(76.6)

179.7

148.9

Gross Margin (%)

84.4

62.8

80.6

92.7

EBITDA Margin (%)

(400.4)

(2,367.4)

(711.2)

(183.2)

Normalised Operating Margin

(465.9)

(2,639.4)

(803.5)

(215.8)

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

13.3

Stocks

0.2

0.2

0.2

0.0

Debtors

0.9

2.0

0.7

0.2

Cash & cash equivalents

24.3

14.5

5.7

10.7

Other

1.8

2.0

2.4

2.4

Current Liabilities

 

 

(2.0)

(3.0)

(1.4)

(4.5)

Creditors

(1.9)

(2.4)

(1.3)

(1.6)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

(0.1)

(0.0)

0.0

(2.8)

Other

0.0

(0.5)

(0.1)

(0.2)

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

14.0

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

29.1

18.8

10.5

14.0

CASH FLOW

Op Cash Flow before WC and tax

(8.1)

(11.2)

(9.4)

(6.0)

Working capital

0.2

0.5

(0.3)

0.4

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)

(3.7)

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)

2.2

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)

(7.9)

Source: Company data, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Nanoco Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Nanoco Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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