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BATM armed for a re-rating

The provider of medical laboratory systems, cybersecurity and network solutions is cashed up to accelerate its exciting joint venture with global chip designer Arm Holdings
July 11, 2019

Shares in BATM Advanced Communications (BVC:43.5p), a provider of medical laboratory systems and cybersecurity and network solutions with extensive operations in Israel, started trading on the Tel Aviv Stock Exchange this month, exactly 20 years after the company joined the main list of the London Stock Exchange.

BATM will retain its primary London listing and shares on both the Tel Aviv and London stock exchanges will be fully transferrable. Based on 438m shares in issue, BATM has a market capitalisation of £192m, so it expects to become a constituent of the TA-90 index, which tracks the 90 shares with the highest market capitalisation that are not included in the TA-35 index.

The secondary listing will provide a local trading platform for the Israel-based institutions that recently became shareholders after BATM raised $18m (£14.1m) in a placing at 42.5p a share at the end of June. It will also expand the accessibility of the shares to a wider pool of investors and increase the breadth and depth of the company’s shareholder base, with the aim of improving the liquidity and tradability of the shares. That can only be positive for BATM’s share price. It’s worth noting that the company raised $3m more than the $15m minimum amount it was seeking in the placing, highlighting strong investor demand.

 

Profit from network function virtualisation

That’s understandable given that the proceeds of the fundraise will be primarily used in BATM’s network and cyber security division to fund an acceleration of the network function virtualisation (NFV) ecosystem projects that BATM is developing in partnership with the world’s leading chip designer, Softbank-owned Arm Holdings, as the only worldwide software vendor to provide NFV functionality to Arm and Intel platforms.

The exciting partnership is developing infrastructure solutions for NFV, a technology that decouples the network functions, such as firewalling, intrusion detection and caching from proprietary hardware appliances, so they can run in software. The solution is being integrated into the products of major chip makers, including NXP Semiconductors (US:NXPI), a $31bn market capitalisation company listed on the New York Stock Exchange.

The technology could be a real money-spinner for both BATM and Arm holdings given that NFV is going to play a critical role in supporting the services 5G network operators will be able to offer. It can also be used to run applications such as autonomous vehicles. Moreover, network operators and virtualised network function providers will be able to deploy their applications and operate across all major hardware architectures, so leveraging the advancements in different processor technologies. BATM has conducted successful proof-of-concept trials with tier 1 and 2 telecom operators. The royalty stream from major network operators adopting the JDA’s technology could easily run into millions of dollars.

It’s also worth noting that BATM has already launched a new technology under its longstanding partnership with NXP to enable a significant increase in network traffic, without requiring an increase in computing power, when licensing the company’s NFVTime operating system on certain NXP processors built on Arm core technology. In addition, BATM has entered into a strategic technology partnership with Clavister (STO:CLAV), a Sweden-based network security vendor of high-performance cybersecurity solutions, to run its Arm-optimised virtualised cybersecurity platform on NFVTime.

Some of the funds raised from the placing will be used to complete development of BATM’s CyberGuard security product for NFV use cases. With a heavyweight partner in Arm Holdings on board, it goes without saying that BATM is strategically incredibly well-placed to benefit as network functions become increasingly virtualised.

 

Molecular diagnostics: a growth opportunity

The other major growth opportunity for BATM is in its molecular biology diagnostics joint venture business, Ador Diagnostics, a company that is developing a new molecular diagnostic bench-top analyser that is able to probe 100 targets in a single proprietary carbon array. 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.

Earlier this year, Ador secured a $30m (£24m) investment from new investors to provide the funding for the commercialisation of the product in 2020. The initial $14.5m investment was received in April which placed an enterprise value of $44.5m on Ador, implying BATM’s retained 38.2 per cent stake in the joint venture is worth $17m. Moreover, a further $15.5m (at a valuation that will be 33.3 per cent higher than the current enterprise valuation) will be funded by the same new investors at the end of 2020, subject to certain milestones being achieved, highlighting clear potential for even more value creation for BATM’s shareholders.

Around 10 per cent of BATM’s recent equity raise will be used to accelerate development, deployment and certifications (including patents) in BATM’s molecular biology diagnostics business, and for its ground-breaking agri-waste and pharma-waste treatment subsidiaries. This is a very sensible move.

 

Hidden balance sheet value

It’s well worth pointing out that BATM’s retained stake in Ador is held in BATM’s balance sheet at a fraction of its read-through valuation, as is the company’s 95 per cent stake in Adaltis, an Italian manufacturer of medical diagnostics equipment that has a read-through valuation of £45m. BATM had $18.5m (£14.8m) of net cash and conservatively valued property assets worth $16m (£12.8m) at the start of 2019, too.

BATM’s cyber security division is clearly valuable, too, as a standalone venture. The business has been winning a raft of contracts, one reason it quadrupled operating profit to $3.6m on 16 per cent higher revenues of $57.5m in 2018.

2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 3.02.17 (p)Latest bid price on 10.07.19 (p)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.2543.20141.7
Kape Technologies (formerly Crossrider)KAPE47.9883.5591.1
Chariot Oil & Gas (see note one)CHAR8.294.4050.7
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
Avingtrans AVG2002457.226.1
H&T HAT289.7532522.419.9
Bowleven (see note four)BLVN28.912155.1
Management Consulting Group (see note five)MMC6.18360-3.0
Tiso Blackstar Group (see note six)TBG5519.90.54-62.9
Average    32.8
FTSE All-Share Total Return  64857523 16.0
FTSE AIM All-Share Total Return 9771027 5.1
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 Mar 2018). Simon turned buyer of the shares again on 17 April 2019 ('Chariot's North African adventure', 17 April 2019).
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 Apr 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 Johanesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. 
6. 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.

 

Target price

I first advised buying BATM’s shares, at 19.25p, in my 2017 Bargain Shares Portfolio, and top-sliced half the holding, at 50p to bank a 159 per cent partial gain (Bargain Shares: Exploiting pricing anomalies and top-slicing’, 3 Dec 2018).

I then advised running profits, at 48p, when I covered the annual results in early March and introduced a sum-of-the-parts valuation of 60p (‘BATM’s earnings beat prompts strong upgrades’, 6 Mar 2019). I still feel that is a realistic valuation, implying a target market capitalisation of £263m after taking into account the £14.1m of new equity raised last month, recent developments on the Arm strategic partnership and the pending commercialisation of the Ador Diagnostics business.

Offering potentially 38 per cent share price upside to my 60p target price, I once again rate BATM shares a buy on a bid-offer spread of 43.2p to 43.5p ahead of next month’s results. They will undoubtedly make for a good read. Buy

 

■ Stock clearance offer ends 15 July. Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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. 

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