Bargain hunting in the tech sector carnage

Part of the reason is the spike in government bond yields as monetary authorities replace their unprecedented monetary largesse during the Covid-19 pandemic with quantitative tightening programmes during the recovery. The discounted cash flows of high growth companies are worth far less when you tweak the discount rate upwards. However, it’s not the only headwind facing markets.

As I noted in last month’s Stock Picking feature, “a market environment facing the headwinds of inflationary pressures, lower growth rates and tightening monetary policy will favour thematic stock picking strategies rather than riding off the coat-tails of rising markets.” I maintain the view that increasing exposure to low price-to-book-value companies offering decent dividend yields is a sensible strategy. I also feel that some heavily oversold tech stocks now offer attractive investment opportunities.

BATM exceeds profit estimates

• Underlying cash profit of $15.4mn in 2021 expected to rise to $18.1mn in 2022
• Enterprise valuation to cash profit multiple of 14 times
• Shares to be excluded from inclusion in the UK indices from 21 March 2022
• Partnership with Advantech to provide Edgility virtual networking and edge compute operating system

BATM Advanced Communications (BVC:47.1p), a provider of medical laboratory systems, diagnostic kits, cyber security and network solutions, has posted a positive trading update in advance of releasing annual results on Monday, 28 February 2022. It also revealed it is trading slightly ahead of market forecasts.

When I covered the interim results last summer (‘Bargain sharers: On the earnings upgrade’, 23 August 2021), house broker Shore Capital raised its 2021 cash profit estimates from $23.5mn to $28.4mn, up from $19.9mn in 2020, on revenue of $138mn (£102mn). On this basis, expect 2021 pre-tax profit to rise by 70 per cent to $23mn and deliver earnings per share (EPS) of 3¢. Admittedly, a non-core business disposal boosts the profit number, but on a like-for-like basis analysts still upgraded their cash profit estimate by at least 16 per cent to $15.4mn.

As expected, the outperformance has been underpinned by “significant growth in BATM’s diagnostic division”. Moreover, with a substantially stronger order backlog than at the same point in 2021, the momentum has continued into 2022, so much so that both BATM’s directors are guiding investors to expect 17 per cent growth in underlying cash profit to $18.1mn this year.

Net of cash on the balance sheet, the group’s £176m enterprise valuation equates to 13 times 2022 forecast cash profits. That’s an incredibly low-ball rating considering BATM’s high margin edge computing and network function virtualisation product suite, Edgility, is clearly gaining momentum. Growth here is being driven by telecom operators leveraging the benefits of 5G through Edge computing and offering differentiated services to their enterprise customers.

For example, Advantech (TW: 2395), a NT$299bn (£7.9bn) market capitalisation leader in industrial Internet of Things (IoT) has just announced a partnership with BATM wherby the group's Edgility virtual networking and edge compute operating system will be pre-installed on a variety of Advantech's universal edge network appliances. Established in 1983, Advantech generates over $1.7bn of annual revenue across 20 countries, so this is a major agreement that enhances BATM’s competitive position and route-to-market.

However, despite the operational outperformance, BATM’s shares have lost 40 per cent of their value since the start of 2022. Two company specific reasons explain why.

Firstly, index tracking funds are being forced to sell their holdings. That’s because the group's nationality was reassigned from the UK to Israel in this month’s FTSE Nationality Review of Companies, published by FTSE Russell. So, although the dual-listed shares will continue to trade on both the London Stock Exchange and the Tel Aviv Stock Exchange, BATM will no longer be eligible for inclusion in the FTSE UK Index Series (such as the FTSE All-share) from 21 March 2022 under the rules.

BATM’s board are seeking authority from shareholders to use some of the company’s cash pile ($59.6mn at 30 June 2021) to repurchase up to 10 per cent of the shares in issue through a buy-back programme. That’s a sensible move especially as the recent share price weakness has been compounded by a bear raid after an anonymous short seller published and circulated an online report on BATM.

From my lens, the contents of that report have misled investors and created a false market in the shares, thus rewarding the short seller. I have no problem with the practise of short selling itself, it facilitates liquidity in markets. I do though have a problem with short sellers hiding behind anonymous reports in which they make unsubstantiated allegations to try to undermine investor confidence. BATM shareholders are the victim here. That said, any short sellers holding positions should prepare themselves for a painful singeing of their paws if, as I suspect, the forthcoming annual results provide further reassurance to investors about the strong fundamentals of BATM’s operations, and specifically its diagnostic business which was the target of the anonymous short-seller attack.

I included BATM’s shares, at 19.25p, in my 2017 Bargain Shares portfolio, and although the share price, at 47p, is well below the 91p level when I covered the interim results six months ago, expect the unwarranted drawdown to reverse as investor confidence is restored. Buy.

TMT’s heightened risk premium offers value opportunity

• Portfolio company Bolt raises €628mn in equity raise to value TMT’s stake at $103.6mn
• Stake in cloud storage company Backblaze worth $33.6mn
• Proforma cash of $33mn post disposal of entire shareholding in Depositphotos

TMT Investments (TMT:560¢), a $176mn market capitalisation venture capital company with a portfolio of high-growth, internet-based companies, has reported over $40mn of portfolio valuation gains since the start of 2022.

Bolt, the international taxi and food delivery company that serves 100mn customers in 45 countries and over 400 cities across Europe and Africa, raised €628mn (£523mn) last month in a new equity finance round led by Fidelity and Sequoia that valued the fast-growing company at €7.4bn. In 2014, TMT invested $0.32mn in Bolt, a holding that is now worth $103.6mn, or 56 per cent higher than the carrying value in TMT’s last accounts. In addition, Workiz, a leading SaaS provider for the field service industry, has completed a new equity funding round that resulted in a $3mn (298 per cent) uplift in the value of TMT’s stake.

By my reckoning, and after factoring in the cash exits from delivery and transportation technology company Hugo and Depositphotos, a leading stock and video marketplace, TMT now has cash of around $33mn on its balance sheet. TMT also holds a valuable stake worth $33.6mn in Nasdaq quoted cloud storage group BackBlaze (US:BLZE).

Effectively, the stakes in Bolt, BackBlaze and cash on TMT’s balance sheet back up $170mn of the group’s $176mn market capitalisation which means than TMT’s portfolio of 50 plus other unquoted investments are in the price for $6mn even though they are cumulatively worth around $95mn (302¢). Clearly, this is at odds with TMT’s investment team’s enviable track record of spotting early stage technology investments and realising hefty gains on exit. In fact, my spot proforma NAV per share estimate of 841¢ is 173 per cent higher than when I included the shares, at 250¢, in my market beating 2019 Bargain Shares Portfolio. The board have paid out a special dividend of 20¢ a share, too.

Admittedly, the general de-rating of technology stocks on the Nasdaq has severely dented investor sentiment. BackBlaze’s stock has performed even worse than the market. Having raised $100mn at $16 a share in November’s IPO, and seen its stock price double to a closing high of $31.50 shortly thereafter, BackBlaze’s shares plunged a further 29 per cent to a record low of $9.89 on 18 February 2022 after the company’s quarterly net loss widened from $3.4mn to $9.6mn. This has clearly not helped sentiment towards TMT.

Furthermore, investors may have been spooked by the fact that 78 per cent of TMT’s 31.45mn shares in issue are held by a handful of Russian investors. However, all the group’s investments are domiciled in the U.S.A. and Europe, TMT is registered in Jersey, and only four members of the 11-strong investment team are based in Moscow.

Of course, given the possibility of a Russian invasion into Ukraine, and potential for the West to impose sanctions on both the sovereign state and companies operating within the country, then there is geopolitical risk to factor in. However, the fundamentals supporting the portfolio of investee companies and the strength of TMT’s investment team are the same as they were before. What has changed is the risk premium investors embedded in the company’s shares. That premium is at a heightened level, the primary reason why TMT’s share price has pulled back from the 850¢ placing price when TMT raised $19.3mn from investors (‘Exploiting market anomalies’, 25 October 2021).

If you have been following my advice I would hold your nerve. That’s because TMT’s 33 per cent share price discount to my spot NAV estimate should narrow dramatically in the event of an easing of geopolitical tensions with Russia. That is still the default position of financial markets. Hold.

Allied Minds’ portfolio companies attract heavyweight investors

• Federated Wireless raises $58mn in Series D funding round
• OcuTerra Therapeutics has closed a $35mn Series B funding round from new investors
• BridgeComm in discussions with multiple investors for new funding round

Allied Minds (ALM:19.5p), a Boston-based intellectual property (IP) commercialisation company focused on investing in early-stage companies with disruptive technologies, has provided some reassurance to its’ long suffering shareholders.

The group’s largest investee company, Federated Wireless, has raised $58mn in Series D funding round that places a post-money valuation of $288mn on the company and values Allied Minds’ 24.19 per cent fully diluted stake at $69.7mn (21.4p a share). That holding alone is worth more than Allied Minds own market capitalisation of £46.7m (19.5p). Federated Wireless operates at the cutting-edge of shared spectrum Citizens Broadband Radio System (CBRS) technology, which supports the explosive growth of wireless data. It has over 350 customers and 85,000 connected devices across the U.S.A., serving the defence, government, education, utilities and telecommunications.

Singapore’s sovereign wealth fund, GIC, and Cerberus Capital Management both participated in the latest funding round, the proceeds of which will be used to accelerate the expansion of Federal Wireless’ Connectivity-as-a-Service (CaaS) low-cost subscription, high-performance secure private wireless network solutions that are delivered from the cloud. Federal Wireless is monetising the technology through collaboration agreements with channel partners AWS, Azure, Intel and Cisco. It’s realistic to expect further valuation uplifts given the growth potential in this space as 5G secure private networks are a must to connect everything from robots, cameras, signage and machinery to virtual reality applications.

In this week's portfolio update, Allied Minds directors also revealed that they are in the advanced stages of disposing of the group’s residual holding in restaurant supply chain software provider Touch Bistro for $4.3m, and have sold a 71 per cent stake in property insurance analytics firm Spark Insights in exchange for $0.7m of shares in Concirrus, a private UK-based insurance technology company. This leaves the group with pro-forma cash at the parent level of $13.3m, a sum worth 4.1p a share.

In addition, OcuTerra Therapeutics has closed a $35m Series B funding from new investors which values the portfolio company at $51.3m and places a $7.3m (2.25p) value on Allied Minds 14.18 per cent fully diluted holding. The proceeds will fund a Phase II clinical trial of its OTT166 asset in diabetic retinopathy, as well as for other working capital needs.

Allied Minds’ portfolio company, BridgeComm, is also engaged in discussions with multiple investors in a new funding round, having developed and commenced sales of its Optical Inter-Satellite Link terminals. These are used in programmes for space and ground applications with commercial and US Government customers. Specifically, the patented technology provides ultra-high-speed mesh connectivity for terrestrial, airborne and space systems that require 10-100+ Gbps throughput. Allied Minds retains a 62.9 per cent equity stake that was valued at $23.9m (7.3p a share) at the last funding round. Boeing HorizonX Ventures, the venture arm of Boeing Company, is co-investor.

Allied Minds 24.1 per cent holding in Orbital Sidekick should have investment upside, too. The stake was valued at $11m (3.4p) following a $16m Series A financing round in April 2021. It was led by led by Singapore's state-backed investment company Temasek and valued Orbital at $46m. The company is developing aerial and space-based hyperspectral imaging and analytics to enable efficient monitoring of natural resource assets and infrastructure integrity. Later this year, Orbital plans to deploy four advanced hyperspectral imaging satellites with edge processing capabilities to provide daily targeted monitoring for the defence and commercial markets.

By my reckoning, Allied Minds portfolio has a read through valuation of $125mn (38.5p) using the valuations at the last funding rounds, or double the company’s current market capitalisation. Importantly, the investee companies are now attracting the interest of some shrewd technology investors. So, although Allied Minds share price has drifted from 24p to 19.5p since I last covered the investment case (‘Five investment company bargains’, 8 April 2021), I feel that there are catalysts for a narrowing of the 50 per cent share price discount to sum-of-the-parts valuations. Buy.

■ 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. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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