Britain's future technology winners

Edinburgh-based Frontier IP (FIPP:67p), a technology investment company that provides commercialisation services to university spin-outs in return for ‘free equity’ stakes, has delivered another impressive year of growth, buoyed by £10.9mn of unrealised gains and a realised profit of £2.9mn on the £6.5mn part disposal of its holding in Nasdaq-listed Exscientia (US:EXAI), a clinical-stage pharma technology company pioneering the use of AI to design new drugs.

Since the financial year-end, Frontier has sold a further £3.4mn of shares in Exscientia to lift its pro-forma cash pile to £7.7mn (14p a share). This means the company has realised almost £10mn of cash proceeds from an investment that originally cost £2,000 and still retains a stake worth £5mn. Importantly, Exscientia is not only well capitalised, having more than $730mn (£652mn) of balance sheet cash, but has forged important partnerships with some of the world's biggest pharmaceutical companies, including Bristol Myers Squibb and Sanofi, and institutions such as the Bill & Melinda Gates Foundation. The University of Dundee spin-out has potential to reap $5.2bn of milestones and royalties from these partnerships, too.

By realising cash from Exscentia – the holding now only accounts for 10 per cent of Frontier’s net asset value (NAV) of £48.7mn – Frontier’s management has sensibly reduced portfolio concentration risk as well as building up a cash pile which can be used to further diversify the portfolio.

Frontier’s largest investment is now an 18.3 per cent stake in University of Plymouth spin-out Pulsiv Solar. Following the first close of the company’s new funding round over the summer, the holding was revalued upwards from £5mn to £9.1mn, accounting for 19 per cent of Frontier’s NAV of £48.7mn. There could be materially more investment upside to come.

That’s because 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 patented technology converts electricity much more efficiently – in tests it wastes only about 10 per cent of the energy – so it could significantly reduce the strain on national power grids if adopted on a large enough scale while also lowering bills for consumers. Pulsiv is in advanced discussions with major manufacturers and has signed a strategic distribution agreement with Astute Electronics and a global distribution agreement with Digikey Electronics, the world's fifth largest electronic components distributor. The company is also working with German engineering giant Bosch to optimisr the design of an energy-efficient solar microinverter prototype for mass manufacture.

Frontier also booked a £1mn unrealised gain on its 17 per cent stake in The Vaccine Group (TVG), a company that is creating a wide range of vaccines based on a novel herpesvirus-based platform with a core focus on preventing the spread of zoonotic and economically damaging diseases. TVG achieved a major milestone in the development of its next generation Covid-19 vaccine for use in animals. Specifically, trial data from pigs showed strong T cell responses to SARS-CoV-2, the virus that causes Covid-19, as well as the more divergent SARS-CoV-1. This means the vaccine has the potential to provide broad immunity against current and future variants.

Other vaccines under development include those for African swine fever, bovine tuberculosis, bovine mastitis, streptococcus suis, Ebola and Lassa fever. To date, TVG and its international partners have been awarded more than £9mn in grant funding from the UK, US and Chinese governments. Frontier’s stake in TVG is now valued at £5.5mn, or 11 per cent of NAV.

It’s worth flagging up a few of the hidden gems in Frontier’s portfolio of 24 equity investments including University of Central Lancashire spin-out Alusid and Cambridge University spin-out, CamGraPhIC.

Alusid 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 35 per cent less energy and 75 per cent less water 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.

CamGraPhIC is developing graphene-based photonics technology for scalable optical transceivers, devices at the heart of high-speed data and telecommunications networks which could become a core enabling technology for 5G networks. In laboratory conditions, the technology has operated at speeds twice that achieved by existing technologies, and uses 70 per cent less energy, too. CamGraPhIC has attracted interest from major multinationals in the chip and telecoms sectors, and from investors who recently backed a £1.3mn funding round.

Trading in line with my last buy call (‘A British technology winner’, 8 August 2022) and 19 per cent above my 56.5p entry point (Alpha Research: ‘A differentiated IP play’, 15 November 2019), the 24 per cent share price discount to NAV is a harsh rating in light of management’s track record and the potential for further investment gains and realisations from the well-funded company’s portfolio. Buy.

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