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Disciplined Allied Minds poised for growth

The IP commercialisation specialist's portfolio has a more clearly-defined focus
January 25, 2018

Investors in Allied Minds (ALM) did not enjoy a very smooth ride during 2017 but we think the investment company now looks better placed to create and realise value from its portfolio of investments in early-stage, innovative companies.

IC TIP: Buy at 162p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points

Takeover potential

Leaner portfolio

Cash burn expected to fall

Increased external investment 

Bear points

Lossmaking

Valuation difficult

Shares in the intellectual property commercialisation specialist tumbled in April last year following management’s announcement that it would be cutting funding for seven of its subsidiaries in order to focus on higher-growth investments. While this had a negative impact on the group’s net asset value (NAV) in the short term, we think Allied Minds could soon reap the rewards of its action.

Following the departure of founder and chief executive Chris Silva in mid-March last year, former non-executive director Jill Smith stepped up to the top job. Ms Smith cut funding to seven subsidiaries – Biotectix, Cephalogics, CryoXtract, Novare Pharmaceuticals, Optio Labs, RF Biocidics, and Tinnitus Treatment Solutions. These companies represented 27 per cent of the total portfolio value, but had significant funding costs to maintain their operations. That freed up around $14m (£10m) of capital expenditure budgeted for 2017, or $9m net of restructuring charges.

The group is left with 12 portfolio companies in the technology and life sciences sectors, as well as two platform companies – Allied Minds Federal Innovations, handling technology sourced from federally funded laboratories, and Foreland Technologies, focused on cyber security. However, management is focusing on six core holdings to drive returns, which represent 89 per cent of portfolio value at the end of June. Themes being targeted include machine learning, smart networks, medical/consumer tech convergence and space. Managers have been appointed at individual portfolio companies, which will be accountable for progress towards commercialisation. 

The goal is to gain external validation for its portfolio companies as early as possible. The best way of doing this is by attracting greater external investment. Allied Minds has historically sought to remain a majority investor in its portfolio companies. Bringing in outside investors helps to de-risk an investment. Recent funding deals include the closing of a $6m preferred funding round for BridgeSat, which delivers big data securely using low earth orbit satellites with greater speed and cost-effectiveness than radio frequency solutions. And Federated Wireless, which has developed a technology platform to unlock under-utilised spectrum for wireless communications, completed a $42m Series B funding round led by strategic investors: Charter Communications, American Tower and Arris Group. All three are actively developing plans to include the platform in their networks.

There has been some consolidation among Allied Minds' rivals, notably IP Group’s (IPO) takeover of Touchstone Innovations, which completed in October. This makes sense for IP commercialisation companies, given one of their main attractions is offering benefits of scale in an industry that often has its success defined by the odd massive win against many small failures. Given its depressed share price, we think there could be the potential for a takeover bid for Allied Minds.

ALLIED MINDS (ALM)   
ORD PRICE:161pMARKET VALUE:£384m
TOUCH:160-161p12-MONTH HIGH:427pLOW: 115p
FORWARD DIVIDEND YIELD:0.5%FORWARD PE RATIO:na
NET ASSET VALUE:25ȼNET CASH:$177m
Year toTurnoverPre-taxEarningsDividend
31 Dec($m)profit ($m)per share (ȼ)*per share (ȼ)*
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)*Dividend per share (ȼ)*
20153.3-97.9-36nil
20162.7-129-44nil
2017*4.0-116-39nil
2018*4.6-120-401
% change+15
Normal market size:2,000   
Matched bargain Trading    
Beta:0.46   
*Credit Suisse forecasts, adjusted PTP and EPS figures £1=$1.38