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A smart technology play offering material upside

A little known small-cap investment company focused on high growth technologies in food technology, autonomous vehicles, smart eyewear and respiratory medical devices has delivered eye-catching valuation gains.
A smart technology play offering material upside
  • NAV surges 56 per cent to US$51m in latest six-month period.
  • Value of 15 per cent stake in Belluscura has since soared 70 per cent to £15.4m since the half year-end.
  • Portfolio company, Lucyd, launches crowdfunding at double Tek’s pre-money valuation in its interim accounts.

TekCapital (TEK:22.25p), a £29.1m market capitalisation company that holds a concentrated investment portfolio focused on high growth technologies in the food technology, autonomous vehicles, smart eyewear and respiratory medical devices, has released eye-catching interim results.

Net asset value (NAV) surged 56 per cent to US$51.1m (39c a share) in the six months to 31 May 2021, buoyed by a thumping US$8.6m (£6.2m) paper gain on Tek’s pre-IPO holding of 17.1m shares in recently floated Belluscura (BELL: 90p), an Aim-traded company that is developing and commercialising IP in the medical devices space. Belluscura's first product, the X-PLO₂RTM, is a lightweight FDA cleared portable oxygen concentrator (POC) that has been designed to replace larger, metal oxygen tanks and heavier POC devices. Weighing less than 1.5kg, it is the world's first modular POC and generates more oxygen by weight than any other FDA cleared POC in its class.

The World Health Organisation (WHO) estimate that 328m people globally have Chronic Obstructive Pulmonary Disease (COPD), of whom 65m have moderate or severe symptoms and 90 per cent are typically middle-aged or older adults who smoke. COPD is the third leading cause of death in the world, symptoms being breathlessness, a persistent chesty cough, frequent chest infections and persistent wheezing.

Analysts estimate the POC market could be worth US$2.4bn (£1.75bn) within three years, up from US$1.66bn in 2020, a high growth market and one that is growing even faster due to Covid-19. Indeed, WHO plans to purchase 184,000 units at a cost of over US$100m to distribute worldwide, having so far distributed over 30,000 concentrators and 40,000 pulse oximeters and patient monitors across 121 countries.

The medical portable O2 market is expected to grow to US$2.4bn by 2024
 2018201920202021E2022E2023E2024E
Revenue$1.40bn$1.51bn$1.66bn$1.83bn$2.01bn$2.21bn$2.41bn
Source: Global Insights

Importantly, X-PLO₂RTM offers cost benefits to users, too. That’s because they can swap out the filter cartridges to enable higher capacity oxygen flow without having to buy a new device; like upgrading memory on a laptop. The result is significantly more affordable oxygen therapy for the life of the patient. Belluscura's management team plan to spend £3m of the £17.5m proceeds raised in May’s IPO launching X-PLO₂R – the first units will be distributed before the end of September and the company has four distribution agreements in place across East and MidWest America. A further £8m is earmarked to progress additional products within the range for launch later this year and early in 2022.

Investors have been cottoning onto Belluscura's progress, hence why its share price has soared 70 per cent from 53p to 90p since Tek’s half year-end, the effect of which is to add a further US$8.3m (6.3c a share) to the company’s NAV.

Tek Capital's portfolio fair value estimate at 19 August 2021
Portfolio companyCarrying value 31 May 2021Estimated carrying value 19 August 2021Value per shareProportion of shares held
Guident$22.0m$22.0m12.3p100%
Lucyd$7.9m$16.0m9.0p100%
Salarius$3.6m$3.6m2.0p97%
Belluscura$12.8m$21.1m11.8p15%
Smart Food Tek$0.04m$0.04m0.0p100%
     
Portfolio fair value$62.7m35.1p 
Convertible loan notes held $1.8m1.0p 
Net cash$2.5m1.4p 
Intangible assets $0.8m0.4p 
Trade receivables less all liabilities -$0.4m-0.2p 
Total NAV $67.4m37.7p 

ource: Tek Capital's 2021 interim accounts, and London Stock Exchange filings post 30 June 2021. Lucyd valuation at 19 August 2021 is based on US$20m pre-money valuation of Innovative Eyecare used for ongoing crowdfunding round.

 

Tek’s 15 per cent stake in Belluscura is now worth £15.4m, or more than half Tek’s own market capitalisation of £28.8m. There is ample scope for further valuation gains, too. That’s because Belluscura's house broker Dowgate Capital believes that by 2023 the £103m market capitalisation company will reach profitability and be cashflow positive based on 12,000 units sales. Having hit that inflexion point, analysts are predicting the company could be selling 22,000 units (based on 5 per cent share of the POC market) in 2024 to produce revenue of US$47.9m, cash profit of US$11.4m and earnings per share (EPS) of 6.5p. With gross margin around 50 per cent, the operational gearing of the business is such that profits and EPS would treble in 2025 based on 50,000 unit sales.

Belluscura financial forecasts 2021 to 2025
 2021E2022E2023E2024E2025E
Units sold1502,00012,00022,00050,000
Revenue$0.2m$3.0m$19.8m$47.9m$109.9m
Ebitda-$2.3m-$4.6m$1.1m$11.4m$33.5m
EPSnana0.1p6.5p18.2p
PE nanana83
Net cash$17.4m$9.8m$7.9m$17.3m$44.6m
Source: Dowgate Capital (27 July 2021)

 

Clear investment upside from e-glasses

Tek is also reaping material upside from its 100 per cent holding in Lucyd, a company that owns 80 per cent of US operating subsidiary Innovative Eyecare, the first company to deliver prescription glasses with Bluetooth® technology. Its frames help the wearer connect safely and conveniently, by enabling many common smartphone tasks to be performed handsfree via voice assistants. Lucyd Lyte e-glasses are prescription-ready and offer streamlined designs, ultra-light weight of just 1.2-1.4 ounces, and a best-in-class playback per charge.

Innovative Eyecare is commercialising the technology, having just signed its first distribution agreement with a leading Canadian eyewear distributor to deliver a minimum of US$4.6m worth of Lucyd Lyte e-glasses over a 30-month period. Tek’s stake in Lucyd almost trebled in value to US$7.9m in the latest six-month period, but Innovative Eyecare has just launched a US$500,000 crowdfunding (US$100,000 raised to date) at a pre-money valuation of US$20m. Effectively, this doubles the value of Lucyd’s equity stake from US$7.9m to US$16m.

 

Microsalt® gaining traction

The good news story doesn’t end there as Tek holds a 97 per cent stake, worth US$3.6m, in Salarius, a food technology business that owns a patented process to produce nanoparticle sized salt, Microsalt®, a new all natural, non-GMO, Kosher, low-sodium salt. These small crystals dissolve faster on the tongue, so you need to use less salt, whilst still having the same salty taste. Less salt means about 50 per cent less sodium for most applications. It addresses the snack food industry’s aim of developing and providing "better for you" products that both taste good and help reduce sodium intake.

In addition to the focus on B2B sales of MicroSalt® to snack food companies, Salarius launched its own snack food brand called SaltMe!, shipping the snacks potato chips to stores throughout the U.S.A. and selling them on Amazon. It has also signed national distributor UNFI to introduce the snacks into the retail market as well as appointing Hanks Brokerage to assist the sale of Microsalt to snack food companies in southwestern States. The low sodium ingredient market is estimated to grow at a compound annual growth rate of 11.5 per cent in the next five years and could be worth US$1.6bn by 2026 (source: Market Data Insights).

 

A play on autonomous vehicles

Tek’s largest investment is Guident, a 100 per cent subsidiary that is developing remote monitoring and control centre (RMCC) software to improve the safety of autonomous vehicles (AVs) and land-based delivery robots. It incorporates artificial intelligence and advanced network technologies to minimize signal latency and improve reliability.

Growing consumer preference for buying products through an online source, coupled with the Covid-19 pandemic, is accentuating the growth of the autonomous last mile delivery market. In addition, delivering a package by drones or by AV is increasing due to demand for fast delivery of packages, which further boosts the growth of the autonomous last mile delivery market across the globe.

Guident’s first RMCC for AVs will be launched later this year in Boca Raton, Florida and will monitor multiple vehicles from a remote, secure monitoring centre, akin to air traffic control. Guident’s management believe its technology will provide last mile delivery fleet operators with an additional level of safety, whilst complying with Florida Law, which requires a RMCC for AV's that do not have drivers or safety operators within the vehicles. It is covered by six U.S. patents (several with foreign counterparts) and proprietary software designed to enhance the safety of autonomous deliveries. The total value of Guident’s patents is US$28m, although Tek has a US$22m valuation on its 100 per cent holding in the company.

Importantly, Guident’s management has the requisite industry experience to exploit the commercial potential. Chief executive and chairman Harold Braun served as chief executive of Siemens Networks (NYSE:SI), and Aviat Networks (NASDAQ: AVNW), director Johan De Nysschen is chief operating officer of Volkswagen USA and a former executive vice president of General Motors (NYQ:GM), and chief revenue officer Daniel Grossman created General Motors mobility division Maven, and helped pioneer the Zipcar brand globally.

Bearing this in mind, Guident also owns the exclusive license to U.S. patent 8,941,251 from the Research Foundation of the State of New York. The patent enables the manufacture of electromagnetic regenerative shock absorbers with high energy densities that can recover a vehicle's vibration energy which is otherwise lost due to road irregularities, vehicle accelerations and braking. The unique design utilises rotary mechanical motion rectifiers that can be tuned to achieve better damping characteristics than existing shock absorbers. Two listed original equipment manufacturers (OEM's) have already signed non-disclosure agreements to evaluate the potential of incorporating these new shock absorbers into their electric vehicles.

 

Tek’s NAV set to surge in second half

Factoring in the 70 per cent share price re-rating of Belluscura since Tek’s half year-end (31 May 2021), and the ongoing crowdfunding raise of Innovative Eyecare at a pre-money valuation of US$20m, I estimate Tek’s spot NAV has increased by US$16.3m to US$67.4m including net cash of US$2.45m. Based on 130.9 shares in issue, spot NAV per share is around 51.5c (37.7p), up from 39c (28.5p) on 31 May 2021.

I first suggested buying Tek’s shares at 15.5p earlier this summer (Alpha Research: ‘Follow the smart money on technology’, 15 June 2021), and the share price hit my 25p initial target following this week’s interim results before profit taking set in. However, with the company set to deliver another surge in NAV in the second half to 30 November 2021, I am raising my target price from 25p to 35p. Trading on a bid-offer spread of 22p to 22.5p, Tek's shares are priced to deliver a highly profitable outcome. Buy.

 

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