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Uncovering hidden value

A company that provides a range of commercialisation services to university spin-outs in return for ‘free equity’ stakes has made eye-catching gains following the IPO of a clinical-stage pharma technology company
Uncovering hidden value
  • Exscientia’s IPO values Frontier IP’s stake at £25.3m, or 45 per cent of its own market capitalisation
  • Pro-forma NAV per share of 91p up 60 per cent on last valuation and that excludes any other investee company valuation uplifts.
  • Portfolio companies Pulsiv Solar and CamGraPhIC making operational progress and raise new money at premium pre-money valuations.

Amid the stock market volatility in recent weeks, UK investors have overlooked a major portfolio announcement from Frontier IP (FIPP:103p), a £57m market capitalisation investment company that provides a range of commercialisation services to university spin-outs in return for ‘free equity’ stakes.

That’s because Frontier’s largest portfolio company, Exscientia (EXAI:NSQ), a clinical-stage pharma technology company pioneering the use of artificial intelligence (AI) to design new drugs, has just listed its shares, at $22, on Nasdaq in an IPO that raised $304m for the company and valued it at $2.6bn. Frontier IP owns 1.565m of the 117.9m American Depository Receipts in issue, giving it a 1.3 per cent stake worth $34.9m (£25.3m). The stake was only held in Frontier’s accounts at £6.3m (11.4p a share) at 31 December 2020, so there is a marked-to-market gain of £19m (34.5p a share) to add to Frontier IP’s last reported net asset value (NAV) of £31.2m (56.7p a share). Effectively, pro-forma NAV per share is around 91p and this excludes any gains made on other portfolio companies since the start of 2021.

Bearing this in mind, I am especially keen on prospects for portfolio company Pulsiv Solar, which is accelerating the development and scaling up of its technology to improve the energy efficiency of power converters in a wide range of everyday products. A spin-out from the University of Plymouth, the company has been working with a major multinational to incorporate its technology into a new consumer product line and with German engineering giant Bosch to optimise design of an energy-efficient solar microinverter prototype to prepare it for mass manufacture. An £880,000 fundraising and debt conversion since Frontier IP’s last accounts values Pulsiv at £21.8m, implying the company’s 18.8 per cent equity stake is worth at least £4.1m (8.1p a share).

I am also very keen on University of Cambridge spin-out CamGraPhIC, which raised £0.6m in its first equity fundraising in June and a further £1.6m at the end of September this year. The funds are being used to accelerate development of its graphene-based photonics technology for scalable, faster, cheaper and more energy-efficient optical transceivers. These have potential to become a core enabling technology for the high-speed data and telecommunications needed for 5G networks and beyond. Current versions of the technology have indicated speeds of up to 100Gbps per lane and very low energy loss. Their speed is about twice that achieved in laboratory conditions by equivalent technologies, while they consume at least 75 per cent less energy. Frontier IP holds a 20.8 per cent equity stake worth £1.5m (2.7p a share), and £1m of loan notes.

One of the most exciting investments is Frontier IP’s 17 per cent stake (book value of £3m, or 5.5p a share) in The Vaccine Group, a company that is developing vaccines initially for use in animals to tackle Sars-Cov-2, the virus causing Covid-19.

The bottom line is that there are multiple catalysts here for investors to latch onto when Frontier IP reports its annual results next month and updates investors. So, having initiated coverage at 56p (Alpha Research: ‘A differentiated IP play’, 15 November 2019), and last suggested buying the shares, at 83p (‘Exploiting companies under the radar’, 28 April 2021), I see scope for Frontier IP's share price to rally back to this year's 114p highs, and beyond, given the operational progress made by investee companies and the huge unrealised gains on the Exscentia stake. Buy.

 

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