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Investment company watch

A technology investment company has reported eye-catching gains, while an opportunistic bid for another Ben Graham value play is worth ignoring.
March 18, 2022
  • Unrealised gains on investment portfolio trebles to £11.9mn in first half to 31 December 2021
  • Net asset value (NAV) up 21 per cent to £46.6mn (84.7p a share) since 30 June 2021
  • 25 per cent of stake in Exscientia sold for £6.1mn since half-year end

Interim results from investment company Frontier IP (FIPP:87p) are a clear vindication of the board’s strategy of providing commercialisation services to university spin-outs in return for ‘free equity’ stakes that can then be exited at healthy gains.

Not only has the Edinburgh-based company booked £11.9mn of gains on its £43.9mn equity portfolio – mainly as a result of the Nasdaq IPO of Exscientia (US:EXAI), a clinical-stage pharma technology company pioneering the use of artificial intelligence to design new drugs – but Frontier has sold a quarter of its stake for £6.1mn since the half-year end, realising a gain of £2.8mn. When I initiated coverage on the shares, at 56p, Frontier’s shareholding in Exscientia was in the books for £5.16mn and I suggested it could be worth more than the UK company’s whole £28.2mn market capitalisation on an exit (Alpha Research: ‘A differentiated IP play’, 15 November 2019). I maintain that view.

I also believe that the remaining holdings in Frontier’s portfolio are conservatively valued (book value of £21mn after £2.2mn uplift in first half) given that Frontier generally only raises valuations when there is a third-party funding event. This means that investee companies can be making significant operational progress, and creating value for all shareholders, but Frontier’s own carrying values have yet to reflect this.

A good example is University of Plymouth spin-out Pulsiv Solar. Frontier holds an 18.3 per cent stake, which was last valued at £4.1mn. Pulsiv has developed patented technology that improves the energy efficiency of power converters in a wide range of everyday products such as battery chargers, lighting applications, electric vehicles, portable power tools and DC motors. About half the electricity used by devices is wasted due to inefficient power conversion – that's why converters heat up in operation. However, Pulsiv's novel technology converts electricity much more efficiently – in tests it wastes only about 10 per cent of the energy.

The company has been working with a multinational to incorporate the technology into a new consumer product line, and with German engineering giant Bosch to optimise the design of an energy-efficient solar microinverter prototype for mass manufacture. With electricity prices surging in the past 12 months, the technology could be gold dust and may be worth many times Frontier’s low-ball valuation, especially as Pulsiv has 13 patents granted worldwide on its technology, including in the US, Europe, China, Taiwan and Japan. Frontier’s chief executive, Neil Crabb, notes that Pulsiv is developing strongly and expects positive news in the coming months. I also note that Pulsiv has appointed a former investment banker as its chief financial officer with more than 20 years’ experience working with companies on equity, debt, mergers and acquisitions.

It’s not the only jewel in Frontier’s portfolio. There are several, including a 33.8 per cent stake in Robert Gordon University spin-out Celerum. The company has recently launched and won its first customer (a haulier) for Truck Logistics System, a commercial product that uses novel artificial intelligence based on nature-inspired computing. The software improves road haulage efficiency, cutting costs, carbon emissions and delivery times. A project conducted on behalf of Highlands and Islands Enterprise across food and drink supply chains in northern Scotland showed it has potential to cut carbon emissions by up to 40 per cent if suppliers and logistics firms work together to share loads. With fuel prices at record highs, Celerum’s Truck Logistics System is an easy win for hauliers looking to trim costs.

Another hidden gem is University of Central Lancashire spin-out Alusid. The company has developed innovative formulations to create premium-quality tiles by recycling industrial waste ceramics and glass, most of which would be otherwise sent to high-impact landfill. Alusid's sustainable process technology uses up to 29 per cent less energy than conventional tile manufacture while still running on the same equipment, reducing CO2 emissions. The company has already signed a commercial agreement to supply a major tile retailer.

The bottom line is that Frontier’s pro-forma cash pile of £6.4mn and the liquid holding in Exscientia back up 42 per cent of the company’s own market capitalisation. This not only de-risks the investment case, but prospects of Frontier’s other investee companies delivering hefty valuation gains is being underrated with the shares trading around net asset value (NAV). Buy.

 

A derisory bid to ignore

  • CFE makes final offer for CIP Merchant Capital
  • CIP Merchant Capital portfolio outperforms Aim materially since first offer made

Corporation Financière Européenne S.A. (CFE) has upped its low-ball cash offer from 55p to 60p a share for CIP Merchant Capital (CIP 62p), a Guernsey-based closed investment company that takes a private-equity-style approach to investing.

I previously recommended ignoring the first derisory offer and maintain that advice (‘Bargain shares: On the results and M&A beat’, IC, 24 January 2022), having included the shares in my market-beating 2020 Bargain Shares Portfolio. CIP’s shareholders are hardly receptive to it either as CFE, the company’s largest shareholder, has only raised its stake from 31.8 to 36.6 per since I published my article seven weeks ago.

Moreover, it’s not as though CIP’s portfolio has performed badly since the first offer was made. Indeed, the company’s NAV per share has only dipped 4.2 per cent from 87.7p to 84.1p from 13 January 2022 to 15 March 2022, during which time the FTSE Aim All-Share shed 15.7 per cent of its value. For CFE to highlight the weakness of Aim and ignore CIP’s marked outperformance is disingenuous.

In fact, there is no mention in CFE’s latest and final offer of it being pitched 28.5 per cent below CIP’s latest NAV. It’s worth noting, too, that around 18 per cent of CIP’s NAV of £46.2m is held in cash following profitable realisations, and the company holds several listed investments that could be readily liquidated, including CareTech (CTH), a heavily asset-backed provider of social care services, Milan-based digital marketing group Alkemy S.p.A. (It:ALK), and point-of-care company EKF Diagnostics  (EKF). Ignore the offer.

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