Bag a technology bargain buy

Shares in Edinburgh-based Frontier IP (FIPP:41.5p), a technology investment company that provides commercialisation services to university spin-outs in return for ‘free equity’ stakes, dipped 10 per cent post annual results. The fall was caused by an unexpected 6.5 per cent (£3.1mn) reversal in net asset value (NAV) after the group booked a £2.2mn unrealised loss on its 17 per cent stake in The Vaccine Group (TVG).

TVG is creating a range of vaccines based on a novel herpes virus-based platform to prevent the spread of economically damaging diseases in livestock. The company now has eight vaccine candidates approaching proof of principle. Its most advanced projects are for pigs. During the year, TVG successfully developed a vaccine candidate for streptococcus suis, a bacterial disease carried by pigs that causes productivity losses as well as meningitis and other symptoms in humans. The project was funded by the UK and Chinese governments.

In addition to streptococcus suis, TVG has developed a transmissible candidate vaccine against a virus called Lassa fever for use in rats that spread the disease. Funded by a US government agency, a small-scale trial showed the candidate could be transmitted between rats, significantly improving their immunity to Lassa fever and reducing its spread between them. The company is in discussions with potential partners.

Progress on monetising its technology will be needed to drive TVG’s valuation higher, but that’s not out of the question. It’s something that Plymouth spin-out, green technology company Pulsiv Solar, the group’s largest holding, is already doing. Its on-chip technology not only improves the energy efficiency of power supplies, battery chargers, LED lighting and photovoltaic solar cells, but is proving popular with leading electronic component suppliers around the world looking to exploit the commercial opportunity. A £1.5mn fundraising placed a £50mn pre-money valuation on Pulsiv, which means that Frontier’s 18.2 per cent equity stake has a read-through valuation of £9.4mn, accounting for 28 per cent of its £33mn equity portfolio at the 30 June 2023 financial year-end.

Portfolio companies with promise

The operational progress of harvest robotics developer Fieldwork Robotics, a spin-out from the University of Plymouth, is also attracting investor interest. Post Frontier’s financial year-end, the company secured a £1.5mn investment from Elbow Beach Capital, a decarbonisation, sustainability and social impact investor, and attracted £1.5mn of investment from 575 investors in a Seedrs funding round. The £7.2mn pre-money valuation placed a £1.6mn value on Frontier’s equity stake. Having developed the world's first raspberry-harvesting robots to improve farm efficiency, reduce food wastage and help solve the problem of worker shortages, the funds raised are being used to grow Fieldworks’ team, outsource robot manufacture and attract more farmers to its harvest-as-a-service offering. 

It’s a similar positive story at Cambridge University spin-out CamGraPhIC. The company’s graphene-based photonics run at higher speeds and lower temperatures than equivalent technologies – and therefore use less energy. Data centres, which consume around 1 per cent of global energy output, are one potential market for its optical transceivers. Sir Michael Rake, former chair of BT Group (BT.A), invested in CamGraPhIC’s latest funding round, which raised £1.26mn to complete the fabrication and testing of demonstration devices with multinational companies. The technology is starting to gain traction with governmental organisations, too. In the financial year, Frontier booked a £1.4mn gain on its 20.8 per cent stake in CamGraPhIC, in line with the fundraising valuation, and a £0.7mn gain on its £2.6mn loan note holding.

Deep discount to sum-of-the-parts valuations

Post period end, Frontier IP subscribed for a further £1.3mn of CamGraPhIC loan notes (of which £0.8mn was classified as Advances in the 2023 accounts) to accelerate its development. The investment reduces group pro-forma cash to £4.1mn. In addition, Frontier intends to dispose of more shares in Nasdaq-listed Exscientia (US: EXAI), a clinical-stage pharma technology company pioneering the use of artificial intelligence (AI) to design new drugs. Frontier currently holds 0.49mn Exscientia shares worth $2.5mn (£2.1mn) at the current market price.

Effectively, the liquid stake in Exscientia and pro-forma cash are worth £6.2mn (11.1p) or a quarter of the group’s market capitalisation of £23mn (41.5p). It means that Frontier’s £33mn (59p) equity portfolio, £5.9mn (10.5p) of debt investments and £1mn (1.8p) of trade receivables are in the share price for 58 per cent less than their combined carrying valuations. That’s extremely harsh given the progress being made by both CamGraPhIC and Pulsiv Solar. In fact, I would be surprised if their combined valuation doesn’t exceed Frontier’s current market capitalisation within the next 18-24 months.

So, having made a case to buy Frontier’s shares, at 38p, ahead of the results (‘A tech buy on a 57 per cent discount’, 13 September 2023), I see scope for positive newsflow from portfolio companies to narrow the 50 per cent share price discount to NAV over the coming months. 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 at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.