Nanoco Group — Sensing programme moves to next phase

Nanoco Group (LSE: NANO)

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Research: TMT

Nanoco Group — Sensing programme moves to next phase

Nanoco has signed an extension to its development project with a major European customer, under which it is working on a range of materials for a number of sensing applications, which could potentially lead to volume production in calendar H222 (FY23). Importantly, securing this contract gives management the confidence and cash to retain its nanomaterial development and production capability rather than cutting back to focus on the litigation case against Samsung.

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Nanoco Group

Sensing programme moves to next phase

Project extension

Tech hardware & equipment

14 May 2021

Price

27.5p

Market cap

£84m

Net cash (£m) at end January 2021 (excluding £0.5m convertible loan and £0.9m IFRS 16 lease liabilities)

2.9

Shares in issue

305.7m

Free float

70.0%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

70.5

174.5

Rel (local)

(4.7)

60.6

126.9

52-week high/low

30p

9p

Business description

Nanoco is a global leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials. Its platform includes c 740 patents and specialist manufacturing lines. Focus applications are advanced electronics sensing, displays, and bio-imaging.

Next event

FY21 results

October 2021

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco has signed an extension to its development project with a major European customer, under which it is working on a range of materials for a number of sensing applications, which could potentially lead to volume production in calendar H222 (FY23). Importantly, securing this contract gives management the confidence and cash to retain its nanomaterial development and production capability rather than cutting back to focus on the litigation case against Samsung.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(x)

P/E
(x)

07/19

7.1

(3.8)

(5.0)

(1.34)

0.00

N/A

07/20

3.9

(2.9)

(4.9)

(1.38)

0.00

N/A

07/21e

1.9

(2.6)

(3.9)

(0.99)

0.00

N/A

07/22e

2.0

(2.2)

(3.6)

(0.97)

0.00

N/A

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

Development potentially leads to volume production

In May 2020, Nanoco signed a framework agreement with the major European customer, which we have previously inferred is STMicroelectronics (ST). The first phase of the project, developing a new generation of nanomaterials for potential use in infra-red sensing applications, completed successfully in H121. Nanoco is now working on the second phase, optimising these materials, which is scheduled to complete in Q122. If successful, this phase could lead to production scale-up and eventual volume production in calendar H222, using Nanoco’s existing nanomaterials facility in Runcorn, which has capacity to output materials worth £100m per year.

Cash runway to calendar H222

We revise our FY21 estimates to reflect the project extension but leave our FY22 estimates, which already assume that the project progresses to the scale-up phase, unchanged. Management notes that the revenues associated with the project extension support a cash runway through to calendar H222. This is in line with our model, which identifies a small funding gap of £0.2m in FY22. While we model this as satisfied with debt, in line with Edison policy, we believe that Nanoco would be well-placed to raise further equity finance should the programme with ST move to the scale-up phase.

Valuation: Resolution of patent infringement is key

The progress with ST confirms that there remains significant potential for generating revenues from the supply of quantum dots (QDs) for sensing applications. However, ahead of the ST development project definitely moving to commercial production, we believe that Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung. Although the value of the potential payout has not been disclosed, we calculate that lost revenue in the US 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 Samsung TVs using QDs and sales in other territories.

Revisions to estimates

Management notes that the project extension increases its FY21 revenue expectations by approximately 40%, with the balance of the project revenue falling in Q122. We raise our FY21 revenue estimate by £0.5m, leaving indirect costs unchanged, which results in a £0.4m reduction in the FY21 EBITDA loss. Our FY22 estimates already assumed that the project with ST progresses to scale-up, so we leave these unchanged until there is greater visibility regarding the scale-up phase. Our model assumes that potential commercial production related to the ST programme commences in calendar H222, ie FY23.

Exhibit 1: Changes to estimates

£m

FY20

FY21e

FY22e

Actual

New

Old

% change

New

Old

% change

Revenues

3.9

1.9

1.4

35.7%

2.0

2.0

0.0%

Gross profit

3.5

1.7

1.2

36.9%

1.7

1.7

0.0%

EBITDA

(2.9)

(2.6)

(3.0)

-14.9%

(2.2)

(2.2)

0.0%

Normalised PBT

(4.9)

(3.9)

(4.4)

-10.3%

(3.6)

(3.6)

0.0%

Normalised net income

(4.0)

(3.0)

(3.5)

-13.0%

(3.0)

(3.0)

0.0%

Normalised diluted EPS (p)

(1.4)

(1.0)

(1.1)

-13.0%

(1.0)

(1.0)

0.0%

Net debt/(cash)

(5.2)

(2.5)

(2.1)

21.8%

0.2

0.6

-72.5%

Source: Edison Investment Research

Our estimate revisions result in a narrowing of the financing gap in FY22 by £0.4m to £0.2m. While we continue to model the gap as satisfied by debt in line with Edison policy, we believe that Nanoco would be well-placed to raise further equity finance should the programme with ST progress to the scale-up phase. At this point, we believe that management is likely to take the opportunity to raise finance to cover the working capital required to complete scale-up and initial commercial production phases as well. Management’s target is to progress nanomaterial development and scale-up programmes, of which the initiative with ST is the most advanced, so that the company reaches break-even within three years. Management estimates that break-even is achievable on annual revenues of c £6m.


Exhibit 2: Financial summary

£m

2019

2020

2021e

2022e

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

7.1

3.9

1.9

2.0

Cost of Sales

(0.7)

(0.3)

(0.2)

(0.3)

Gross Profit

6.5

3.5

1.7

1.7

EBITDA

 

 

(3.8)

(2.9)

(2.6)

(2.2)

Operating profit (before amort. and except).

 

 

(5.0)

(4.8)

(3.8)

(3.5)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.3)

(0.7)

0.0

0.0

Share-based payments

(0.2)

(0.4)

(0.6)

(0.6)

Reported operating profit

(5.5)

(5.9)

(4.4)

(4.1)

Net Interest

(0.0)

(0.1)

(0.1)

(0.1)

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)

 

 

(5.0)

(4.9)

(3.9)

(3.6)

Profit Before Tax (reported)

 

 

(5.5)

(6.0)

(4.5)

(4.1)

Reported tax

1.2

0.9

0.9

0.6

Profit After Tax (norm)

(3.9)

(4.0)

(3.0)

(3.0)

Profit After Tax (reported)

(4.4)

(5.1)

(3.6)

(3.5)

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(3.9)

(4.0)

(3.0)

(3.0)

Net income (reported)

(4.4)

(5.1)

(3.6)

(3.5)

Average Number of Shares Outstanding (m)

286

287

306

306

EPS - normalised (p)

 

 

(1.34)

(1.38)

(0.99)

(0.97)

EPS - diluted normalised (p)

 

 

(1.34)

(1.38)

(0.99)

(0.97)

EPS - basic reported (p)

 

 

(1.52)

(1.76)

(1.18)

(1.16)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

4.6

4.6

4.1

3.6

Intangible Assets

3.9

3.7

3.5

3.3

Tangible Assets

0.7

0.9

0.5

0.3

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

9.5

7.2

4.6

2.7

Stocks

0.2

0.1

0.1

0.2

Debtors

1.1

1.0

1.0

1.1

Cash & cash equivalents

7.0

5.2

2.5

0.4

Other

1.1

0.9

0.9

0.9

Current Liabilities

 

 

(4.8)

(3.4)

(3.4)

(4.0)

Creditors

(2.6)

(2.1)

(2.1)

(2.2)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

0.0

(0.6)

(0.6)

(0.6)

Short term bank debt

0.0

0.0

0.0

(0.6)

Other

(2.3)

(0.6)

(0.6)

(0.6)

Long Term Liabilities

 

 

(0.8)

(1.3)

(1.1)

(1.0)

Long term financial leases

0.0

(0.5)

(0.3)

(0.2)

Long term bank debt

0.0

0.0

0.0

0.0

Other long-term liabilities

(0.8)

(0.7)

(0.7)

(0.7)

Net Assets

 

 

8.5

7.2

4.2

1.3

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

8.5

7.2

4.2

1.3

CASH FLOW

Op Cash Flow before WC and tax

(3.8)

(2.9)

(2.6)

(2.2)

Working capital

1.8

(1.5)

0.0

(0.1)

Exceptional & other

0.0

(0.2)

0.0

0.0

Tax

1.4

1.1

0.9

0.6

Net operating cash flow

 

 

(0.6)

(3.5)

(1.7)

(1.7)

Capex

(3.1)

(0.7)

(0.7)

(0.8)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

(0.0)

(0.1)

(0.1)

(0.1)

Equity financing

0.0

3.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

(0.2)

(0.1)

Net Cash Flow

(3.7)

(1.1)

(2.7)

(2.7)

Opening net debt/(cash) - excluding finance leases

 

 

(10.7)

(7.0)

(5.2)

(2.5)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

(0.8)

0.0

0.0

Closing net debt/(cash) - excluding finance leases

 

 

(7.0)

(5.2)

(2.5)

0.2

Source: Company accounts, 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 £49,500 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 2021 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.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 £49,500 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 2021 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.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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