There’s a myth perpetuated by the ill-informed that stock markets are efficient arbiters of value.
For this to be the case investors need to be in possession of all the facts as they pertain to the constituent parts of said market.
Often information isn’t hidden from view, it is simply overlooked or ignored.
In other words, a little digging can (and often does) go a long way to establishing the true picture of an individual investment.
Lack of understanding
Lack of understanding of what’s hot and what’s not tends to lead to bipolar peaks and troughs for small-cap shares that are largely driven by misinformation.
This is bad news if you are the chief executive of a well-run AIM company struggling against a mass of selling, pulling out whatever’s left of your hair while railing against the inequity of your predicament.
However, it is much better news if you are a savvy investor that’s done some in-depth research - for the CEO’s painful problem presents an opportunity.
It spins out the intellectual property (IP) into separate companies and finds management to help capitalise on and commercialise the IP.
The current portfolio includes nine firms that are at technology’s cutting edge, three of which are particularly perky.
TekCapital also has a services business that generated revenues of almost £500,000 in the last six months.
Its shares have dropped from a 2018 peak of 25p in January to 11p today. Does the news flow support that kind of movement? Probably not, but this is AIM, remember.
It means the stock is now trading at a more than 40% discount to the net asset value, and an even greater deficit to its peer group.
For chairman Dr Clifford Gross this is bound to be a source of irritation; however, the lowly valuation may be an opportunity for investors looking for unloved gems.
Remember, do your own research; don’t take what’s written here as gospel.
Hopefully, what you’ll find is a company that has three significant investments in businesses targeting markets worth £1bn-plus, with management teams that have experience at Fortune 1000 organisations.
Any one of those businesses has the potential to be considerably more valuable than Tekcapital itself, analysts reckon.
Bellascura, for instance, with its CURV portable oxygen concentrator, is tapping into a medical devices sector that according to Knowledge Sourcing Intelligence could be worth over £1.5bn a year by 2021.
Huge market potential
Even with a small sliver of those revenues, you have a business worth substantially more than it is today.
Bellascura’s last fundraise gave the business a post-money valuation of US$4.3mln, or £3.3mln. Tek’s 33% stake is therefore worth £1mln, or around 20% of its current market capitalisation.
It also holds 97.5% of Salarius, which owns a patented manufacturing process for producing low-sodium salt, a market expected to be worth £1.4bn by 2025.
And Tekcapital owns a 100% stake in Lucyd, which is developing smartglasses, tapping into a sector already turning over £3bn.
Salarius, Lucyd and the remainder of the portfolio are valued at the cost or value of the acquired intellectual property plus expenses, according to a note produced by Align Research (link here). In other words, TekCapital has taken a very conservative approach to assessing the worth of its portfolio.
And as Align analyst Richard Gill points out: “An uplift in the valuation of any one additional portfolio company, driven by a fundraising or other value event, could have a significant impact on the balance sheet and increase net asset value further.
“In this respect, we have already demonstrated above the potential uplift should the recent director purchase in Salarius be accounted for in the valuation.”
So, that acquisition of stock by CEO Victor Manazanilla implied a potential market worth of £1.5mln.
On the issue of value, it is worth doubling back to take a closer look at Bellascura – or more particularly a peer of the company.
Benchmark for value?
Nasdaq-listed Inogen (NASDAQ:INGN) develops, manufactures and markets oxygen concentrators used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions.
Granted it is revenue generating: the company turned over £75mln last quarter and expects to make around £270mln this year.
But with a market capitalisation of £3.7bn, you can see how highly investors prize new innovative companies with transformational technology.
In the case of Inogen, it is trading on 14-times sales or a price-to-earnings multiple of almost 160 times.
“While applying this kind of valuation to Belluscura isn’t appropriate given its early stage of development, it does go to show the opportunities available in the sector,” points out Align’s Gill.