BATM Advanced Communications (BVC:47p), a provider of medical laboratory systems and cyber security and network solutions, has announced a smart looking deal to raise fresh capital for Ador, the company’s joint venture with Netherlands-based private group Gamida.
Ador has developed a novel molecular diagnostic platform that fully automates the rapid analysis of nucleic acid samples. The bench-top analyser can probe 100 targets in a single proprietary carbon array whereas existing products only probe on average between four and six targets per test sample. It is being targeted at screening for hospital-acquired infections such as MRSA and C. Diff, and to identify tropical infections in travellers returning home with fevers, some of which can be life-threatening and need early and accurate diagnosis.
The product is undergoing final engineering ahead of in-hospital testing in the US and Europe later this year, with the intention of receiving regulatory approval to enable commercialisation in 2020. Here’s the smart part. The joint venture partners will invest $2m each into a new holding company, NewCo, which will own 100 per cent of Ador. A US Family Office with significant investments in the medical sector and Puma Brandenburg Investments, a company majority-owned by Howard Shore, the founder of investment bank Shore Capital, will then fund $10.5m of new capital, implying BATM’s reduced 38.2 per cent stake in NewCo has a read through valuation of $17m. The $10.5m initial investment will primarily be used to build several systems that will be installed with customers for testing; developing and certifying several cartridges catering to different areas of infectious disease; and for sales and marketing efforts.
Furthermore, BATM and Gamida have secured a $15.5m second tranche of funding for NewCo from the same group investors. It will be released subject to Ador achieving certain milestones by the end of 2020 relating primarily to: valid diagnostic results being received for at least 100 patient samples; CE certification; satisfaction of operational and performance requirements; and installation in at least five major healthcare facilities, including at least one major hospital in the US. Upon the release of the second tranche of investment, BATM will have an ownership interest of 30.2 per cent in NewCo, implying a read through valuation of $29m for its stake, or £22m at current exchange rates.
As I highlighted six months ago ('BATM reveals potential of ground breaking diagnostic kit', 29 Aug 2018), if Ador’s technology proves as successful as BATM’s directors believe it could be, then it’s only reasonable to expect a big player such as Abbott Laboratories or Roche Diagnostics to be interested in acquiring it. Moreover, by getting new investors on board at this stage, BATM has de-risked its own investment in Ador’s technology while highlighting the hidden value in its portfolio.
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It’s not the only technology BATM has developed that is being commercialised, either. The share price rallied strongly after I highlighted that BATM had entered into a joint development agreement (JDA) with Softbank-owned Arm, a leading multinational semiconductor and software design company, to develop and market infrastructure solutions for network function virtualisation (NFV) ('Profit from 5GM with BATM', 8 Jun 2018). NFV decouples the network functions, such as firewalling, intrusion detection and caching from proprietary hardware appliances so they can run in software. It could prove to be a real money spinner given that NFV will play a critical role in supporting the services 5G network operators will be able to offer. Indeed, the royalty stream from major network operators adopting the JDA’s technology could easily run into millions of dollars.
That said, nothing is ever certain and, having seen BATM’s shares increase in value by 157 per cent after I included the company in my 2017 Bargain Shares portfolio, I prudently advised selling half your holdings, at 50p, and running the balance for free at the end of last year (‘Bargain Shares: Exploiting pricing anomalies and top-slicing’, 3 Dec 2018). The hefty gains on BATM and cyber security company Kape Technologies (KAPE:102p) have helped my 2017 portfolio deliver a total return of 32.1 per cent, outperforming the 6.4 per cent and 5.9 per cent respective total return on both the FTSE All-Share and FTSE Aim All-Share indices. Importantly, the reason I advised maintaining an interest in BATM is because I believe the company has real potential to generate substantial gains over time from both the JDA with Arm and its stake in Ador and Adaltis (see below).
| 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 3.02.17 (p) | Latest bid price on 1.02.19 (p) | Dividends | Total return (%) |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 46.8 | 0 | 151.1 |
| Kape Technologies | CROS | 47.9 | 100 | 0 | 108.8 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 2.7 | 0 | 43.0 |
| Cenkos Securities (see note two) | CNKS | 88.425 | 106 | 9.5 | 30.6 |
| Manchester & London Investment Trust (see note three) | MNL | 291.65 | 377 | 3.0 | 28.4 |
| Bowleven (see note four) | BLVN | 28.9 | 17 | 15 | 13.8 |
| H&T | HAT | 289.75 | 297 | 15.8 | 8.0 |
| Avingtrans | AVG | 200 | 200 | 4.7 | 2.4 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 20.4 | 0.54 | -61.9 |
| Average | 32.1 | ||||
| FTSE All-Share Total Return | 6485 | 6900 | 6.4 | ||
| FTSE AIM All-Share Total Return | 977 | 1035 | 5.9 | ||
| Notes: 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale. Simon subsequently advised using some of the proceeds from the share sale to participate in the one-for-8 open offer at 13p a share in March 2018 which is taken into account in the total return ('On the earnings beat', 5 March 2018). 2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 April 2017). 3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price. 4. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale. 5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price. 6. Tiso Blackstar has transferred its UK listing to the Johannesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. 7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p, and running the balance for free ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018). | |||||
| Source: London Stock Exchange share prices | |||||
In the meantime, BATM’s cybersecurity division has been winning a raft of government agency contracts which are supportive of the profit growth analysts have embedded in their forecasts. In fact, the company announced a $3.2m (£2.4m) contract award this morning to supply its cyber security hardware and software products to a government defence department.
Admittedly, the shares are priced on 30 times Shore Capital’s cash profit forecast of $8m (£6m) for the 2020 financial year to enterprise value of £180m, albeit these estimates don’t factor in the contribution from the JDA with Arm. However, adopting a sum-of-the-parts valuation approach is more appropriate for BATM given the value embedded in its technology and the fact that it is being monetised through commercial developments and partial divestments.
Bearing this in mind, Egens, a leading biotechnology company, acquired a near 5 per cent stake in BATM’S 95 per cent-owned subsidiary, Adaltis, an Italian manufacturer of medical diagnostics equipment, in a deal that placed a notional valuation of $58m (£44.5m) on the business. BATM also has net funds of $17m on its balance sheet and conservatively valued property worth a similar sum, in addition to other technology it’s developing. It’s not difficult to arrive at a sum-of-the-parts valuation far closer to BATM’s current market value, and one that doesn’t factor in additional upside potential for Adaltis, Ador and JDA with Arm. I am clearly not the only one thinking this way as BATM’s share price is trading close to a nine-year high. Run profits.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
