NetScientific is well positioned for a market rebound
We believe that NetScientific PLC (AIM:NSCI) (NetScientific PLC (AIM:NSCI)) is well positioned to benefit from a recovery in the life sciences and technology sectors. The group has a broad portfolio of investments, including many that are generating sales and several others that are in late-stage clinical trials. NSCI raised £1.5mln in a fundraising in June, strengthening the group's balance sheet, and enabling it to drive forward its growth strategy using its capital light approach. Our updated sum-of-the parts valuation eases by 6% to 162p, primarily reflecting the dilution impact of the fund-raising. The share price remains at a significant discount to our indicative valuation.
The primary components of the group's strategy are as follows:
1) Focus on the realisation of returns: NSCI management spends an extra effort on a cohort of five to six companies where it sees the potential for the strongest returns. NSCI holds a direct stake and has influence in these companies and identifies the potential of £5-10mln+ in cash returns from each for NSCI. Consequently, this cohort of investments has the potential to generate up to £60mln of cash returns to NSCI over a three-year period.
2) Execution: NSCI's proactive engagement and board influence helps portfolio companies to drive commercialisation and growth. This involvement includes helping UK/European companies establish and grow in the US and plan their broader internationalisation strategies. It also involves helping the businesses to scale-up via mergers and acquisitions and plan their exits, including flotations. In addition, it is about utilising EMV Capital, the group's venture capital subsidiary, to help portfolio businesses to secure funding.
3) Future-proofing: The goal is to identify the next cohort of companies where the approach can work. This involves monitoring the group's broader portfolio and building access to deal flow through relationships, including Martlet Capital (Cambridge) and the University of Leuven (Belgium).
Attractive valuation
We have updated our valuation for the strengthened balance sheet following the fundraising, balanced by the reduction to our forecasts, along with the increase in the valuation of PDS Biotechnology (NASDAQ: PDSB) shares from June lows, and the increase in the number of shares outstanding. In all, our indicative sum-of-the parts valuation slips by 6% to 162p, which continues to suggest significant upside potential to the current share price.
Valuation updated for fund-raising and forecast changes
While we provide forecasts, we note that, given the nature of the business, which is focused on growing and realising value from companies through exits, the group P&L is somewhat academic. As the business model is heavily transaction-driven, revenues, profits and cash flow are volatile. We have reduced our forecasts primarily due to the current tough environment for deals at EMV Capital. See page 3 for our forecast changes.
NetScientific (NSCI) is an active holding company with a portfolio of interests in 22 companies based in the US, UK, Europe and Israel. It invests in companies in the life sciences/healthcare, sustainability and technology sectors, and then takes a hands-on approach in supporting the development and commercialisation of its investees, adding value through management support, incubation, advisory services and fundraising support. NSCI’s strategy is to target value inflexion points in the investee company’s life cycle, working to help the company make the transition through these points, and ultimately realise value through a full or partial exit. One key component in the strategy is a “transatlantic bridges” programme, leveraging transatlantic relationships to help small companies in North America or Europe expand their businesses across the Atlantic Ocean and globally.
The company has three different types of holdings:
• Subsidiary companies: Investees that have become wholly controlled consolidated entities
• Minority holdings: Investees where NSCI holds a minority stake, but with a hands-on strategic engagement from NSCI. NSCI takes a deeper involvement in selected companies which offer the potential for greater returns
• Capital Under Advisory: Through its EMV Capital subsidiary, NSCI operates a venture capital style ‘capital light’ model of investing, syndicating investments for third-party investors, with EMV providing support and oversight. EMV receives fee income as well carried interest that is realised upon exit (typically 15-20% above a 110% hurdle)
Company background and strategy
While higher-growth, and higher-risk, sectors including biotechnology have taken a hit in recent months, due to the tightening monetary conditions across the globe, we have seen some stabilisation in recent weeks. We believe that NSCI is well positioned to benefit from a market recovery, due to the diversity of its investments, the managements hands-on investment approach and the discount the stock trades to our valuation metrics. Nine of the group 20 investments (excluding holding companies) are generating sales and three are in late-stage clinical trials. Most of the groups' holdings are in life sciences/healthcare, while others are in technology sectors including robotics, semi-conductors and smart-building automation.
Q-bot, which develops robots for use in the construction and retrofit industry, recently raised £1.6m to accelerate sales of its ‘robot as a service’ offering. The funds will allow Q-Bot to accelerate the roll-out of its unique solution of remotely applying underfloor insulation across the UK and internationally. NSCI has a 23.7% direct stake in Q-bot, along with 16.7% held under advisory through the group's subsidiary, EMV Capital. A bigger fundraising for Q-bot is anticipated in due course.
The company has completed the acquisition of a direct 30% stake in Vortex Biotech Holdings (Vortex) and it has announced the appointment of a new Vortex CEO. We believe this is potentially a bargain valuation. The Vortex business has been restructured, and we note that around $38.5mln has been invested in the business. The management knows this business very well, and we believe the group's 30% stake could potentially be worth £15-20mln at exit. We note that Vortex has a similar offering to AIM-listed company Angle PLC (Angling Direct PLC (AIM:ANG)), which has a market capitalisation of around £182mln and revenues of £1mln.
Going forward, we see an increased opportunity for exits/liquidity events across the group's cohort of companies as we move into 2023 and beyond.
Recent market events and news flow
Forecast changes
We have reduced our forecasts primarily due to the current tough environment for deals at EMV Capital. Our EMV Capital revenue forecasts come back by 27% in FY22, by 26% in FY23 and by 22% in FY24. We have also eased our ProAxis forecasts due to market conditions while the restarting of trials have taken longer than expected. In all, our group revenue forecasts fall by 22% in FY22 to £1.8mln, by 18% in FY23 to £3.2mln and by 16% in FY24 to £4.8mln. We note that the group's business model is heavily transaction-driven, hence revenues, profits and cash flow are volatile.
We now forecast the group to close the current financial year with net cash of £0.8mln (previously £0.2mln net debt), which swings to £1.0mln of net debt at the end of FY23 and rises again to £1.5mln at end-FY24.
Valuation
We have updated our valuation for the fundraising. Our peak net debt forecast remains broadly the same at £1.5mln, reflecting the net proceeds of the fundraising balanced by the reduction in our forecasts. Meanwhile, the PDS Biotechnology (NASDAQ: PDSB) valuation has rallied over recent weeks, and hence the discount on the year-end director's valuation has narrowed. Finally, the number of shares outstanding has risen. Consequently, our baseline adjusted book value per share slips from 119p to 113p, which is 92% above NSCI's current share price. Our estimated key valuation uplifts, as explained in our previous note, published in June, remain the same and our overall indicative valuation slips by 6% to 162p, reflecting the increased number of shares. This valuation is 175% above the current share price. In our view, a portfolio exit or liquidity event could result in a significant narrowing of this gap.
Please see our previous note, published in June, for the group's full portfolio summary, as it stood at the end of December 2021.
Indicative valuation
Source: Proactive Research