Should you risk investing in Nanoco Group

Should you risk investing in Nanoco Group despite a 85% fall in share price?

For those who don’t know what Nanoco Group does is they research, develops and large-scale manufacture heavy-metal-free quantum dots and semiconductor nanoparticles.

But, should you be investing in Nanoco Group?

First, let’s start with annual results.

Preliminary Results

Share Price: £0.23 (up 3%)

Market Capitalisation: £67m. (share count rose from 237m to 286m)

 

Nanoco Group has reported revenue of £1.6m this year, up from £0.8m last year. But this looks a bit suspicious because the value of sales has actually fallen.

If you look the details, you would see deferred revenue of £1.2m in 2016 (see below).

 

 20172016
£m£m
Value of sales invoices (“billings”) raised during the year1.11.9
Release of deferred revenue0.5
Less revenue deferred to future years(1.2)
Revenue and other operating income per consolidated statement of comprehensive income1.60.7

 

If you see read the first row that says: “Value of sales invoices (“billings”) raised during the year”, Nanoco has achieved sales worth £1.1m in 2017 vs. £1.9m in 2016. The art of deferring revenue means Nanoco took a hit last year to revenue this year.

Nanoco’s revenue isn’t close to breaking even. It needs to turnover £10m-£12m per year.

And that is a long way off!

The group Cash, cash equivalents and deposits were £5.7 million. Add the placing of £8.6m, then it has net funds of £14m (enough to last for another 18 months).

Nanoco’s mistake

Nanoco has been developing “Quantum Dots” for a long-time and has frequently touted how big this market is by stating that 26m of display units (using cadmium free Quantum Dots) would be sold by 2021, compared that with 6m units sold last year.

Their share price performance suggests that other companies will benefit from quantum dots technology.

Outlook

Management has stated that their Runcorn plant has the capacity to produce enough CFQDs to supply approximately 1 million large TVs per annum. Further capacity can be achieved with limited capital expenditure and will be brought online as demand increases.

But, without financial details, investors can’t quantify how much revenue it can produce if they receive contracts.

As always management is upbeat!

 

 

Nanoco Group Historic Share Price

Nanoco group share price has taken a beating in the last four years when it once peaked at £1.80 per share giving it a value of £380m. Now, the shares at £0.22 per share or £54m.

Recently, the company raised £8.6m through placing 22m shares for 18 pence at a massive 35% discount to the share price of 28 pence (at the time). Also, management subscribed to 1.2m of these shares, which takes the total to 23.2m share representing 10.0 percent of the existing Ordinary Share capital. The admission is expected to occur in November 2017 (today).

By the way, the last time they did a placing, the discount to share price was smaller at 25% and the placing price was £1.05.

 

 

 

 

Historical Performance

 

Nanoco Group was once a promising company back in 2011 to 2013 as turnover rose to £4m. Since then, turnover has been inconsistent.

For me, this is odd because Nanoco’s management has been touting progress and commercialisation of its business. But we need the revenue from these commercialisations and licensing deals?

It leads to one conclusion: “Competition in this space is super competitive!” That’s why investors have been dumping their shares.

Nanoco Group PLC (NANO) - MKT. CAP. vs. Turnover

 

A more accurate and useful graph compares Nanoco’s R&D expenses with turnover (see below):

Nanoco R&D vs. Turnover

You can see it continues to invest in time and energy, but sales have moved in the opposite direction. In fact, since 2010, they spend a total of £28m in R&D but manages to earn £16.2m in sales, and most of these sales are before 2014!

Also, the company’s intangible asset value is a minuscule £2.4m in 2016.

Whatever R&D they are developing it’s going down the toilet.

 

Nanoco’s fundraising

So, how is it possible for Nanoco to stay as a going concern?

Well, did you even need to ask?

The obvious answer is through share issues, resulting in share price dilution.

Nanoco fundraising

The chart above tells you since 2008, Nanoco burns roughly £44.4m in cash, but raised £54.3m from numerous share issues. But here are some other facts you may not be aware of:

1). Total directors pay since 2008 came to £6.2m or 12% of the fundraising.

2). Almost 50% of the money raised went to R&D.

3). The number of shares rose from 184.8m to 237.1m (true as of 2016). I expect future fundraising will involve more share issue because of the lower share price. (see above for details)

 

By the way, the last time they did a placing, the discount to share price was smaller at 25% and the placing price was £1.05.

 

 

Valuing Nanoco Group

Increasingly, Nanoco Group is relying on their cash balance for support.

Nanoco cash balance and market valuation

The chart above shows Nanoco’s cash reserves is increasingly supporting their market valuation. Now it accounts for over 20% of market capitalisation.

 

 

Putting it all together

 

After seeing their historical performance and assessment of today’s results, I would advise avoiding Nanoco Group, unless you have done some in-depth research or know the company has secured a large order.

Other than that, the risk of investing in Nanoco Group is high because you are seeing the share price decline further through future placings, due to lack of financial progress.

 

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 DISCLAIMER

 

The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.  I don’t hold the company’s shares unless stated.

  • ih8aloss

    Based off of this analysis Quantum Materials Corp. – QTMM is looking pretty damn good and will be Quite The Money Maker in 2018! Check them out at https://www.QMCDots.com