I have been keeping a close eye on the US central bank’s interest rate tightening cycle, and with good reason given the implications that bond yields have on equity valuations in general, and technology companies, in particular.
The Federal Reserve has raised its benchmark policy rate by 0.75 percentage points for the second month in a row, lifting its target range of the Federal Funds rate to 2.25 to 2.50 per cent. The move had been priced in and a further 0.5 to 0.75 per cent rate rise is anticipated at the September meeting.
Of more importance are the comments from Jay Powell, Fed chairman, who noted that “it will likely become appropriate to slow the pace of [future] increases” while policymakers assess how rate rises are affecting the US economy and inflation. The implication is that we are past peak hawkishness, a sentiment shared by bond investors. Six weeks ago, market expectations for the peak Federal Funds rate [in February 2023] was 3.9 per cent, but it is now 3.3 per cent. It’s no coincidence that the S&P 500 bottomed out in mid-June, too. Improving market sentiment is a positive for a higher rating of Aim companies, and one of my 2022 Bargain Shares Portfolio constituents, in particular.
Innovative Eyewear IPO to drive Tekcapital re-rating
- Half-year net asset value (NAV) up 13 per cent to $76.9mn (£63.4mn)
- NAV per share rises six per cent to 51¢ (42p)
- $7.5mn net portfolio gains driven by valuation uplifts on holdings in Lucyd and Microsalt
- Net cash of $2.3mn
Tekcapital (TEK:29p), an Aim-traded investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices, has reported a half-year pre-tax profit of $6.7mn driven by unrealised portfolio gains.
The group holds 4.92mn shares in Innovative Eyewear (US:LUCY), the US operating subsidiary of Lucyd, the first company to deliver prescription glasses with Bluetooth technology. Innovative is in the process of listing its shares on Nasdaq. Based on the lower end of the proposed $5.50-7.50 per share price range, Tek’s holding has been revalued upwards by 55 per cent to $27mn (15p a share) in its latest interim accounts. Tek also holds $1.8mn (1p a share) of convertible loan stock which will convert into equity in the IPO.
Improving market sentiment – the Nasdaq Composite index has rallied 13.5 per cent since mid-June – also improves the likelihood of a successful IPO for Innovative, a factor simply not embedded in Tek’s 31 per cent share price discount to NAV. In fact, Innovative has just filed an updated prospectus with the shares priced at $8.50 at the mid-point of the new indicative pricing range, implying Tek's holding of 5.15mn shares (post conversion of convertible loan stock) could be worth $43.8mn (24p a share). In other words, there is potential for a $15mn additional uplift to Tek's NAV of $76.9mn to lift NAV per share from 51¢ to 61¢ (50.4p a share).
In addition, Tek booked a $1.5mn unrealised gain on its holding in Microsalt after the food technology business received an equity investment of $0.4mn last month from Spanish venture fund Tech Transfer Agrifood at a post-money valuation of $9.3mn. Microsalt has developed a patented process to produce a new natural, non-GMO, kosher, low-sodium nanoparticle-sized salt. Tek’s stake in the company is now worth $7mn (3.8p a share).
| Bargain Shares Portfolio 2022 | ||||||
| Company name | TIDM | Market | Opening offer price 11.02.22 | Latest bid price 28.07.22 | Dividends | Total return |
| Tavistock Investments | TAVI | Aim | 4p | 9.58p | 0p | 145.6% |
| H&T | HAT | Aim | 304p | 386p | 8p | 29.6% |
| Vector Capital | VCAP | Aim | 46.6p | 48p | 1.51p | 6.4% |
| Tekcapital | TEK | Aim | 29.15p | 28.25p | 0p | -3.1% |
| Henry Boot | BOOT | Main | 300p | 284p | 3.63p | -4.1% |
| Billington | BILN | Aim | 214p | 193p | 3p | -8.4% |
| Sylvania Platinum | SLP | Aim | 98.4p | 87p | 2.25p | -9.3% |
| Conygar | CIC | Aim | 160p | 130p | 0p | -18.8% |
| Average | 17.2% | |||||
| FTSE All-Share Total Return index | 8,525 | 8,220 | -3.6% | |||
| FTSE Aim All-Share Total Return index | 1,258 | 1,061 | -15.7% | |||
Source: London Stock Exchange
A pull-back in the share price of Aim-traded respiratory medical device company Belluscura (BELL:90p) proved a drag on the overall results, but the listed stake is still worth $18.9mn (10.3p a share), or double last year’s IPO price. It also backs up 36 per cent of Tekcapital’s own market capitalisation of £43.4mn.
I remain positive about Belluscura’s prospects and note that the company has just launched a Bluetooth enabled, next generation portable oxygen concentrator which provides more oxygen by weight than any portable oxygen concentrator in its class. It also has an app that enables patients to connect other Bluetooth devices such as smart phones, pulse oximeters, and Fitbit wearables. In addition to selling its products through distributors, Belluscura has commenced selling them direct to consumers, so expanding its market to boost sales growth.
Tek’s share price is in line with the entry point in my 2022 Bargain Shares Portfolio, and the hefty discount to NAV should narrow dramatically if Innovative’s IPO is successful. A likely listing of Microsalt on the London market in 2023 offers another valuation catalyst, too. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ 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 priced at £16.95 each plus postage and packaging.
Summer Promotion: Subject to stock availability, the books can be purchased for £10 each plus £3.95 postage and packaging, or £20 for both books plus £5.75 postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
