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BATM’s hidden value

The provider of medical laboratory systems, cyber security and network solutions is shaping up for a vintage anniversary year
August 22, 2019

I have had an enlightening results call with the directors of BATM Advanced Communications (BVC:45p), a provider of medical laboratory systems, cyber security and network solutions with extensive operations in Israel.

The £197m market capitalisation company is celebrating its twentieth anniversary on the main list of the London Stock Exchange. It’s shaping up to be a vintage one, too, as analysts at house broker Shore Capital predict that BATM’s full-year adjusted pre-tax profits are set to more than treble from $2m to $6.7m (£5.5m). This is partly driven by a forecast $8m increase in revenue to $128m, but also by gains on investments in joint ventures, highlighting the hidden value in the company’s balance sheet.

For instance, at the start of the year, BATM secured a $30m (£24.8m) investment from new investors to provide the funding for the commercialisation of 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.

BATM’s retained 38.2 per cent stake in Ador is worth $17.2m, a hefty sum in relation to BATM’s $4m investment prior to the $14.5m initial investment by the new investors. Furthermore, an additional $15.5m at a valuation a third higher than Ador’s current enterprise valuation of $45m will be funded by the same new investors at the end of 2020, subject to certain milestones being achieved. Bearing this in mind, BATM chief executive Zvi Marom says that the meningitis cartridges have already gained CE approval, and the bench-top analyser machines are likely to gain CE approval in the coming months, ahead of in-hospital testing and full commercialisation of the product.

The point being that BATM has only booked a $3.2m gain on its Ador investment, and carries all investments in associates and joint ventures at just $9.4m on its balance sheet. The retained 38 per cent stake in Ador is worth almost double this sum alone, and that doesn’t factor in a likely sharp increase in the value of the stake when commercial quantities of the diagnostic bench-top analyser and cartridges are shipped in 2021.

Tapping into 5G potential

There are exciting prospects in 5G, too, as BATM’s network and cyber security division is accelerating the network function virtualisation (NFV) ecosystem project that it 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 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 technology will be critical in the functionality of mobile applications in 5G and can also be used to run applications such as autonomous vehicles.

Dr Marom notes that Arm Holdings could be ready to sell the technology to its customers shortly and is “planning some very large proof of concept 5G trials.” The point being that having made its investment in NFV technology, and integrated it into products of major chip makers including NXP Semiconductors (US:NXPI), a $34bn market capitalisation company listed on the New York Stock Exchange, then BATM is incredibly well placed to reap the rewards as consumer demand for 5G really takes off. 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.

It’s well worth noting that analysts at Shore Capital have not included any contribution from NFV sales in their 2020 revenue estimate of $137m, nor in their 2021 revenue estimate of $148m when they predict BATM will be making pre-tax profit of $9.4m. Both forecasts also exclude any contribution from Ador, too, thus highlighting scope for outperformance.

I would also flag that BATM’s network and cyber security business is set for a storming second half, and beyond. Finance director expects the division to report annual revenues of $61.5m, up from $57.5m in 2018, and at a similar margin, thus offering scope to increase the unit’s adjusted operating profit of $5.5m. Please note the 2018 profit has been restated due to new accounting standard IFRS16.

Of course, BATM will be absorbing short term losses on some joint ventures as the businesses develop, too. For instance, the $3.2m gain on the Ador investment will be halved once you take into account BATM’s 38 per cent share of Ador’s losses this year, but this is already factored into the aforementioned analyst profit forecasts.

Creating shareholder value

What’s clear to me is that BATM is in the process of creating significant value for shareholders through its joint ventures, and potentially a multi-million dollar royalty stream from its partnership with Arm Holdings. That’s not in the price which is why having 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 subsequently advised reinvesting the proceeds from that share disposal to take advantage of a repeat buying opportunity, at 43.5p, earlier in the summer (‘BATM armed for a re-rating’, 11 Jul 2019).

I feel that my sum-of-the-parts valuation of 60p is a very realistic target to value the company’s equity at £262m, or treble the last reported net asset value of $100m after taking into account last month’s $17m (£14m) equity raise at 42.5p, details of which I covered in some detail in my last article. That’s because BATM now has net cash of $34.6m (£28.5m); the retained stake in Ador is worth £17.2m and could easily be worth double that valuation by the end of 2020; BATM’s 95 per cent stake in Adaltis, an Italian manufacturer of medical diagnostics equipment has a read-through valuation of £45m; and BATM owns conservatively valued property assets worth $16m (£13.2m).

Furthermore, even if you value BATM’s networking and cyber security division on 16 times last year’s operating profit then it’s still worth around $90m (£74m) as a standalone entity. Add to that the value embedded in the Arm Holdings partnership, and the rest of BATM’s biomedical division, too, and it’s really not difficult to arrive at a 60p sum-of-the-parts valuation. Fund manager Lombard Odier Asset Management clearly sees the investment potential – already BATM’s largest shareholder, it has just purchased 4.3m shares to lift its stake to 26.04 per cent of the 437m shares in issue.

Importantly, there is ample scope for positive news flow in the coming months to focus investors’ mind on BATM’s hidden balance sheet value, and the exciting commercial potential of its technology investments. A return to the April 2019 10-year share price high of 54p, and beyond looks a distinct possibility. Strong buy.

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