Technology winners with a huge ‘margin’ of safety

Interim results from Allied Minds (ALM:38.5p), a Boston-based intellectual property (IP) commercialisation company focused on investing in early-stage companies with disruptive technologies, highlight just why I suggested buying the shares, at 38.5p (‘Exploit Allied Minds’ huge margin of safety’, 30 July 2020).

The company is a classic Ben Graham recovery play, having fallen out of favour under previous management, but is now in the hands of a new board who are mandated to monetise the portfolio and return cash to shareholders. It has some exciting investments that have attracted the interest of heavyweight technology investors in recent funding rounds, too. However, this is not being priced in as $214m (68p a share) of investments held in six unlisted technology companies, and a further $29.2m (9.3p) of cash (adjusted for post period end follow-on investments), are worth double the current share price.

The largest investment is in Federal Wireless, a 42 per cent shareholding with a read-through valuation of $92m (29p) based on the last funding round in April (see below). Founded in 2012, Federated Wireless operates at the cutting edge of shared spectrum Citizens Broadband Radio System (CBRS) technology, which supports the explosive growth of wireless data. The company has already delivered the industry’s first 4G/5G private wireless solution, Connectivity-as-a-Service (CaaS), a low-cost subscription, high-performance secure private wireless network delivered from the cloud. 4G/5G secure private networks are a must to connect everything from robots, cameras, signage and machinery to virtual reality applications.

Federated Wireless’s cloud ecosystem now has more than 40 device manufacturers and computer edge partners, thus opening up access to a plethora of Internet of Things (IoT) and other applications. Earlier this year, the company announced a new CaaS offering that enables US enterprises to buy and deploy private 4G/5G networks with a single click through Amazon Web Services (AWS) and Microsoft Azure marketplaces.

In April 2020, Federated Wireless raised $13.7m in additional Series C funding to accelerate the expansion and adoption of its partnerships with Amazon and Microsoft. The proceeds will also enable expansion into the 6 GHz band for 5G services, thus providing a new path to 1,000 MHz of spectrum for private wireless networks.

It’s easy to see why Federated Wireless has attracted the backing of heavyweight investors including GIC, Singapore’s sovereign wealth fund, as it is building a significant recurring revenue base from its scalable cloud enterprise solution. All the signs point to a highly profitable realisation for Allied Minds in due course. It’s not the only one, either.

Heavyweight investors backing investee companies

Allied Minds’ second largest investment is a 43 per cent stake worth $77.5m (25p) in California-based Spin Memory, a pre-eminent MRAM IP provider. The valuation is based on a fundraising over the summer when Spin Memory raised $8.25m in additional Series B funding (on the same terms as the last close in April 2019) to support ongoing MRAM research. It was backed by Arm, Applied Ventures, LLC (the venture capital arm of Applied Materials) and Abies Ventures, as well as Allied Minds, which contributed $4m.

Through collaboration with industry leaders, Spin Memory is transforming the semiconductor industry by addressing its biggest challenge – memory – in next-generation electronics systems such as AI, autonomous driving, 5G communication and computing at the edge. The increase of IoT devices at the edge of the network is producing a massive amount of data to be computed at data centres, pushing network bandwidth requirements to the limit.

The aim of edge computing is to move the computation away from data centres towards the edge of the network, exploiting smart objects, mobile phones or network gateways, to perform tasks and provide services on behalf of the cloud. By moving services to the edge, it is possible to provide content caching, service delivery, storage and IoT management to improve data transfer rates and response times.

However, technological advancements are exposing the limitations of existing memory capabilities. So, to solve the scaling and power problems of existing memories, Spin Memory is developing disruptive, dense and low-power STT-MRAM IP to replace large, power-hungry on-chip SRAM. The company has achieved significant technical milestones in its partnerships with chipmakers Arm and Applied Materials, and has also been appointed subcontractor to a leading US semi-conductor company on a multi-year, multi-million dollar US government project. This adds weight to the value of Spin Memory’s cutting-edge IP as does ongoing financial support from Arm and Applied Ventures. It’s not the only investee company that’s attracting heavyweight backing.

Since the half-year-end, Allied Minds’ third largest investee company, Denver-based BridgeComm, has secured financing from joint development partner Boeing after achieving development milestones. Specifically, the company has developed ground-breaking technology that provides ultra-high-speed mesh connectivity for terrestrial, airborne and space systems that require 10-100+ Gbps throughput. It has also partnered with Nokia to develop ultra-high-speed throughput solutions for 5G networks. Allied Minds’ holds debt and equity investments in BridgeComm worth a total of $32.9m (10.5p).

Smaller investments offer big potential

Allied Minds’ smaller investments are of interest, too. For instance, Orbital Sidekick is developing aerial and space-based hyperspectral imaging and analytics to enable more efficient monitoring of natural resource assets and infrastructure integrity. Current optical imagery space-platforms only capture a handful of wide colour bands in the visible spectrum and rely on high spatial resolution or temperature data, which severely limits their ability to distinguish objects, materials and chemical compounds.

By contrast, Orbital’s technology captures hundreds of narrow contiguous colour bands in the visible and infrared spectra, providing a unique chemical fingerprint of each target in its data set. Orbital is commercialising the technology, having just been awarded a multi-year contract worth up to $16m by the commercial financing arm of the US Department of the Air Force in conjunction with the Space and Missile Systems Center and the Air Force Research Laboratory. The award will allow Orbital to accelerate the deployment of six advanced hyperspectral imaging satellites with edge processing capabilities to provide daily targeted monitoring for the defence and commercial markets.

Allied Minds owns a 33 per cent stake in Orbital worth $3.9m (1.3p), and post period end invested $2m alongside venture capital firm 11.2 Capital in instruments that will convert into equity at the next funding round.

Allied Minds also owns common stock worth $5.99m (1.9p) in TouchBistro, Inc, a revenue-generating software provider that streamlines restaurants’ operations by integrating the most essential technology solutions such as point of sale, payments and reservations. In August, TouchBistro acquired Allied Minds’ entire stake in smaller rival TableUp, a deal that was pitched at a 27 per cent premium to invested capital. It also makes an exit from the investment more likely in future.

Trading on a 50 per cent discount (41 per cent fully diluted) to the read-through valuation of its investments at the last funding rounds, the likelihood of Allied Minds’ new management team realising significant value from the portfolio is materially underpriced in my opinion. I reiterate my 55p target price. Buy.

ThinkSmart’s bumper capital return

■ Hefty cash dividend declared

■ Afterpay stock price soars to record high

Aim-traded finance company ThinkSmart (TSL:47p) has announced an A$6.5m capital return to shareholders by way of a cash dividend of 6.1¢ (3.3p a share) and one that the board can easily afford as its cash pile now stands at A$18m (£9.8m) following the receipt of a £1.45m payment from Dixons Carphone. Moreover, even after taking the proposed payout into account (ex-dividend: 12 November), net cash will still be A$11.5m (£6.3m), a sum equating to 6.3p a share.

It’s worth flagging up that ThinkSmart’s valuable 10 per cent (6.5 per cent fully diluted) stake in Clearpay, a fast-growing UK payment platform that enables consumers to split the cost of their retail purchases into manageable interest-free payments, has soared in value since my last article (‘Investments for the new normal’, 17 September 2020). That’s because shares in Afterpay Touch (APT:ASX), a A$27bn (£15.2bn) market capitalisation Australian Stock Exchange-listed technology group that owns the other 90 per cent of Clearpay, have surged in value and are trading close to their record high of A$98. To put that performance into perspective, Afterpay’s share price is now 250 per cent higher than when I first suggested buying ThinkSmart’s shares, at 14p, in my April 2020 Alpha Report.

Afterpay’s share price is material to ThinkSmart’s shareholders because the Australian technology group has a call option to buy out the company’s minority stake in Clearpay. The agreed principle in determining the valuation is Afterpay’s own market capitalisation. Likewise, ThinkSmart has a put option to sell to Afterpay.

Bearing this in mind, ThinkSmart’s 6.5 per cent fully diluted stake in Clearpay was last valued at £53.7m at 30 June 2020 after applying a 20 per cent liquidity discount. Afterpay’s share price was A$61 at the time. Using the same methodology, the read-through valuation is now £86m (81p a share). Add to that ThinkSmart’s £9.8m cash pile (before the dividend payout) and £4m of other net assets on its balance sheet, mainly finance lease receivables, and I arrive at a sum-of-the-parts valuation of £100m (94p a share), or 50 per cent higher than the company’s interim reported net asset value of £66.5m. It’s also double ThinkSmart’s current offer price of 47p.

Early buyout increasingly likely

The point is that there is now a huge incentive for Afterpay to try to buy out ThinkSmart’s minority interest in Clearpay before its call option becomes exercisable in 2023. Clearpay is one of the fastest growing e-commerce payment companies in the European market, so can only become more valuable. For instance, the business now has more than 1m active customers (more than 10 per cent of Afterpay’s total customer base), is recruiting new merchants at quite a pace, and Afterpay is accelerating Clearpay’s expansion into Europe through last summer’s acquisition of Pagantis. This will enable Clearpay to enter Spain, France, Italy and potentially Portugal, regions that have a combined addressable e-commerce market worth more than US$247bn, according to Ecommerce Europe, an association representing 100,000-plus companies selling goods and services online to consumers in Europe.

Trading on an unwarranted 50 per cent discount to my sum-of-the-parts valuation of 94p, the pricing anomaly is worth exploiting. Strong buy.

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.