Shares in AIM 100-quoted technology company Nanoco have quite comfortably beaten every other stock on the market for the past three months and analysts think there could be more to come.
Manchester-based Nanoco makes what are known as ‘quantum dots’, or nano particles, which are used in televisions, lights and solar cells. More specifically, big name manufacturers of LCD TVs and LED lighting are beginning to use quantum dots in their products because they improve colour quality.
To illustrate this, in February Sony announced details of its new HD Bravia LED TVs which happen to use quantum dots from Nanoco’s competitor, QD Vision. Analysts viewed this development as generally positive for Nanoco because Sony’s adoption of quantum dots in its displays was seen as a ringing endorsement of the technology.
For Sony, however, the good news is limited because QD Vision’s nano particles are made using a heavy metal called cadmium, which is regulated to the point of being banned in some countries. So Sony will only be able to sell its new TVs in certain markets. The good news for Nanoco and its investors is that its quantum dots don’t use cadmium.
Janardan Menon and Eoin Lambe from Liberum Capital, concluded that the Sony development was “not particularly negative” for Nanoco and said they though that the likes of Samsung and LG were highly unlikely to use quantum dots containing cadmium.
Market re-rating
Nanoco originally floated on AIM in May 2009 after reversing in to then-cash shell Evolutec. Back then its revenues stood at just short of £2 million, with pre-tax losses of £0.78 million. By 2012, those revenues had risen only modestly to £2.95 million but losses had widened to £4.35 million. So what’s changed?
Its stellar recent performance began last December after a comparatively muted 12 months where the stock struggled to break out from a narrow range that peaked in March 2012 at 80p. By late February 2013 the shares were touching 199p and although they have retraced slightly, the stock remains around 100p ahead of where it was three months ago.
Behind that meteoric rise was an announcement in January that Dow Chemical Materials – part of the global giant Dow Chemical – had agreed to licence Nanoco’s quantum dots for use in TVs. Dow is a major supplier of electronic materials to the global display industry and is planning to boost manufacturing capacity in Asia to supply these products to its customers in the region. Full production is slated to begin in the first half of 2014.
While no financial details were released (they are expected later this year), analysts are agreed that the impact of this licensing deal will be significant for Nanoco. John-Marc Bunce at Nomura Code said it was likely that Nanoco would have sought “a significant multimillion dollar upfront licensing fee” for the global exclusive manufacturing rights and that the announcement should be seen as “financially significant”.
Liberum Capital described it as “a game changer”, with major potential customers like Samsung and LG likely to move much faster in adopting its quantum dot technology in their displays due to confidence in Dow’s high volume manufacturing capabilities. In response the broker raised its price target from 160p to 260p and maintained a strong buy recommendation on the stock.
In addition, Nanoco’s contribution (estimated at £10 million) to the capex required to establish the new production facilities may not need to be pulled from its current cash pile of around £15 million. Liberum reckons the costs should be covered by customer funding, customer pre-payments or from future royalty cash flows.
Consensus view
With a market cap of £366 million, Nanoco’s valuation has plainly lost touch with its fundamentals, with analysts setting price targets based somewhere between 20 and 25x 2016 earnings. House broker Canaccord Genuity claim that Nanoco is “a genuinely unique asset” with technology that could prove truly disruptive to the $100bn LCD market and as such warrants a ‘strategic valuation’. Its 275p price target is based on 20x estimated FY16 earnings – based on the assumption there will be no contribution from the Dow deal until FY15. Thereafter it estimates that revenues will grow fourfold in year one.
But not everyone is as bullish. Nomura Code, another broker, offers a more conservative view, raising its price target to 150p and predicting that the Dow deal could signal a short term peak in Nanoco’s valuation. Thereafter, its analysts “expect calculations of the timescales and real financial impact to potentially put a more restrained view on Nanoco’s near term value”.
Overall, there is a consensus view that Nanoco’s Dow deal will transform the company over the medium term and that other industry partnerships are likely to follow. After a three month surge, investors may now be waiting for more financial details, more deals and more revenue before driving the share price further. Nanoco’s interim results are due on 18 March.