$NANO.L - I am sceptical about its valuation

Nanoco (LON:NANO) make Quantum Dots which can be used in things like LCD TVs. So there’s a huge potential market for it in that segment alone, and Dow Chemical has taken a very real interest in the company.

There are investors that I am highly respectful towards who are actually very bullish on this stock, so I stand to look very foolish in this post.

I have to admit that I am very sceptical about current valuations for this company. In my own crude way, I might look at this and say “could this company generate £100m in revenues. If so, then I might put a valuation of £300m on it”. Very very crude way of looking at it, to be sure. Incidentally, I later discovered that the semiconductor sector is trading on a median PSR of 3.46, so my finger-in-the-air multiple of 3 was actually surprisingly close to the mark.

It’s not that I don’t think the bulls are necessarily wrong, or that I think it can’t make those kinds of revenues. But, in my mind, the problem is, even if I’m right, it’s very difficult to get paid off. By a stroke of coincidence, at 138.6p, NANO sits at a market cap of £300m – which basically means there’s no upside for investors at current prices.

That’s just my view, of course, and I just know that they’ll be readers out there who think I’m being naive.

In y/e 31-Jul-2013, NANO had revenues of £3.93m. Next years estimates are £4.05m, but they’re expected to rise sharply to £13.9m the year after. That’s still far short of £100m, and an indication that investors will need to look more than 3 years out to reach those levels.

There’s another thing I didn’t like. On 15-Oct-2013, the company had a placing of 6.37m shares for GBP 10m (at 157p). That represented about 3% of the company’s issued ordinary share capital at the time.

Placings are something I am beginning to look at more closely, and the failure of directors to participate in it was a red flag to me. If the placing was transformational, and the directors thought that the share was cheap, with near-term production, then wouldn’t the directors have backed up the truck? Their failure to do so suggests to me that investors are going to need a much longer term perspective than they probably do already.

So, not for me, I’m afraid, with all due deference to the more experienced investors out there. If you’re bullish, the best strategy would seem to be sit it out, let the company move nearer to production, and hope that sentiment cools off to more sensible valuations.

Just my 2 cents, of course.

138.6p