Quantum dots are mind bogglingly small and potentially extremely useful. Just 10 atoms in diameter, according to Nanoco (NANO) – one of the UK’s leading companies in the field of quantum dot technology – that’s one thousandth of the width of a human hair to those of us who don’t think in atoms. Harnessing the light-emitting power of these minuscule particles can increase the efficiency of televisions, computers, medical imaging devices, solar panels and many other devices. Nanoco has developed a heavily patented way to do this on a commercial scale that avoids the need to use cadmium, a toxic heavy metal that has recently been banned in European displays. With its quantum dots in increasingly high demand from global technology and healthcare companies, we think the group’s share price is due to rise.
UK leader in novel quantum dot technology
Growing number of commercial deals
Forecast uptick in revenue
Strong balance sheet
History of overpromising
Revenue growth is reliant on small number of contracts
Admittedly, Nanoco has not given investors a lot to cheer in recent years. Repeated promises of the ‘first commercial revenues’ have failed to materialise and in the first half of the 2018 financial year, which ends in July, revenue was just £196,000. The problems stemmed from the fact that many of the group’s customers, which were experimenting with quantum dot technology in their newest products, took longer than expected to progress to commercialisation, meaning Nanoco was only receiving minor revenues.
But the group has confirmed that its partners have, at last, started bulk ordering quantum dots as they ramp up production of prior to commercialisation. For example, in June 2017, Nanoco received its first commercial order from Taiwanese screen manufacturer Wah Hong. With the first of these revenues due in the second half of the current financial year, broker Peel Hunt expects annual revenues to be roughly six times higher than the £1.3m generated in 2017. Meanwhile, the broker reckons pre-tax profit could get to £16.4m by 2020 with EPS of 5.4p – for those who still dare to dream after past disappointments, that suggests a forward 2020 price/earnings ratio of nine.
One of the group’s most exciting exclusive contracts is with an un-named US customer, which has agreed to fund the expansion of Nanoco’s manufacturing site in Runcorn. Milestone development payments are expected for the rest of 2018 before the products – which are in the field of nanotechnology – are launched commercially in 2019.
Meanwhile, the delay in any major sales has forced the group to reduce its spending, helping Nanoco gain a much leaner business model. In 2017, management removed 50 staff and £400,000 of costs every month, meaning operating losses narrowed in the six months to January 2018. An £8.6m equity placing at 18p a share in October means the balance sheet is in good shape and with the capital expenditure requirements of expanding the manufacturing site being covered by the group’s US customer, Peel Hunt predicts the cash should last until at least mid-2020.
| NANOCO (NANO) | ||||
| ORD PRICE: | 41.9p | MARKET VALUE: | £120m | |
| TOUCH: | 41-42p | 12-MONTH HIGH: | 50p | 18p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 17 | |
| NET ASSET VALUE: | 5p* | NET CASH: | £8.7m | |
| Year to 31 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 2.0 | -9.3 | -3.1 | nil |
| 2016 | 0.5 | -12.3 | -4.4 | nil |
| 2017 | 1.3 | -10.7 | -3.7 | nil |
| 2018** | 7.5 | -5.4 | -2.0 | nil |
| 2019** | 24.1 | 7.2 | 2.4 | nil |
| % change | +221 | - | - | - |
| Normal market size: | 10,000 | |||
| Beta: | 0.35 | |||
| *Includes intangible assets of £3.2m, or 1.1p a share | ||||
| **Broker Peel Hunt forecasts, adjusted PTP and EPS | ||||
