Small Cap Value Report (Mon 29 March 2021) - NANO, ELCO, CER, BVXP

29th Mar '21 by Paul Scott

77 comments 11721 reads

Good morning, it's Paul here with the SCVR for Monday.

Timing - I've had lunch now (a Parsley Box ready meal - a new float on AIM, best way to research it is to try the product!). Next up at 13:00 I have a webinar from Venture Life (LON:VLG) to listen to. After that (published by say 15:00 here) will be another section on Bioventix (LON:BVXP) as I know a lot of subscribers like that one) . Today's report is now finished.

It's Mello Monday time again - the excellent fortnightly investor evenings via Zoom, organised by renowned investor David Stredder. This evening's show is called a "results special", so David has asked me to do a recap of the most interesting small cap results I've spotted. There are lots of interesting companies presenting, including Judges Scientific (LON:JDG) , Bioventix (LON:BVXP) , and Getbusy (LON:GETB) . It starts at 5pm, one hour earlier than usual. It's not essential to watch the whole thing, people can dip in & out as they wish throughout the show. More details here.

Agenda -

Nanoco (LON:NANO) - brief comment on its legal action against Samsung

Eleco (LON:ELCO) - I review its FY 12/2020 results, which are in line with guidance given in Jan 2021. Looks a nice quality company, probably priced about right.

Cerillion (LON:CER) - Largest ever contract win (again). Impressive growth underway here. This looks an excellent company.

Bioventix (LON:BVXP) - Quick review of the H1 results to 31 Dec 2020 (June year end). A remarkable little company that has been resilient throughout covid.

Nanoco (LON:NANO)

21.5p (pre market open) - mkt cap £66m

Litigation Update

Nanoco Group plc (LSE: NANO), a world leader in the development and manufacture of cadmium-free quantum dots and other specific nanomaterials emanating from its technology platform, announces an update on its litigation against Samsung for the alleged wilful infringement of the Group's IP.

Timings of the legal case against Samsung -

Legal report is due before the end of May 2021.
Legal review of the patents is expected to start in May 2021, and can take a year.
Jury hearing set for Oct 2021, but could be delayed.

Nanoco’s CEO…

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Hugo Elliott

29th Mar '21

Apologies if this is the wrong place to post this.

I just wanted to flag issues with hidden charges (aka egregious FX rates) applied dividends from US stocks held through Interactive Investor (II).

My kids have child ISA’s, in which they hold a small amount of £DGOC. They held 961 shares each on the ex-dividend date (6-Mar-21). On 26-Mar-21 Diversified Gas & Oil (LON:DGOC) paid a dividend of US cents 4 / share. You can opt to receive your dividend in GBP. For those who did, the company paid GB pence 2.85 / share (an FX rate of US$ 1.4035 / GBP 1.00)(https://www.londonstockexchang...). Unfortunately II do not give you the option of receiving your dividends in GBP (if held in an ISA).

My kids received dividends of GB pence 2.19 / share, implying an FX rate of US$ 1.8265 / GBP 1.00. This implies a FX rate premium of 30.1% over the rate used by the Company, and a 29.0% premium of US$ 1.4134 / GBP 1:00 over the 52 week high FX rate as reported by the Bank of England (https://www.bankofengland.co.u...)

The premium seems a little at odds with Interactive Investor’s state margin rate of 1.5% (https://www.ii.co.uk/our-charg...)

I understand their share-holding is tiny, and charges are on average (for smaller holdings) higher, I’m not sure they should be so much higher?

Does anyone else have similar issues? Or can anyone give recommendations on better (more cost effective) brokers? Is this an issue that warrants a complaint to the FSA?

Logical David

Hi Bouden, the FTSE is currently down 938 points from its high of 7,674 attained on the 17th January 2020. That represents a drop of 12.2% from its 2020 high. In other words, 14 months later the stock market still hasn't rebounded all the way back to its pre Covid level.

Who knows, but maybe it may take another year or so to fully recover from the Covid crash. If this is the case then it will have taken a couple of years for the market to fully pullback.

abtan

Bioventix (LON:BVXP)

Hi OldSchool05

Finding out about Troponin competition was a random discovery.

When I was investigating the company and Troponin tests a few years back I came across a BBC article in which a doctor was interviewed about the test.

By coincidence this doctor, clearly knowledgeable in Troponin tests, used to be quite a good friend back in school so I reached out to say hi. When I mentioned Bioventix (LON:BVXP) , he said he'd never heard of them, but that they were probably one of a number of companies competing for the same thing.

And that's when the penny dropped. I was always under the impression that the company had little/no competition, but this is not so.

I have held in the past when the financials looked better relative to the share price (my buy price was 1,879, sell price was in tranches up to c3,000), but right now it's priced beyond my personal comfort levels.

It's certainly a quality outfit though, which is why I like to keep an eye on it. If those Troponin sales visibly start to increase, as the company says they will, I'll be more inclined to get involved again.

Cheers

GarryC

Paul. Thanks for bringing Samsung Samsung Electronics Co (LON:SMSN) in with £NANO. The 'boy' who I get any tech/modern ideas from thinks they are a cracking co and both amazed on the LSE - not sure how that works. See Reddit/WallStreetBets have taken some scalps today. Not much sympathy from initial reads.

Scottish Mortgage Investment Trust (LON:SMT) also mentioned a lot in Shares and IC for some time. Sounded like a good trust but 'in the news' for sure.

MichaelFBS

Thank you for this. Makes interesting reading and has caused me to make a note to investigate further rather continue with blind allegiance because I have held since 2015.

Is there any reason you assumed zero growth in Vitamin D. The other point I would make is that with a net PBT margin of 79% any increase/decrease in sales assumed has significant effect on PBT.

On the Troponin test, the potential addressable market for an assay according to finnCap might be 740 million people where the test might be used for prevention as well as detection after the event. So there may well be 1. A very large market (possibly yet unproven) 2. Room for multiple providers of the test.

Do you mind sharing where you got the table from?

Thank you.

Regards

Michael.

Camtab that is kind of you (the experience comment) though I am not sure!!

I don’ think I am in love with Bioventix (LON:BVXP) . But I am prepared to give time, two maybe three years, for the Troponin test (and anything else that they might come up with) to gain transaction. If it can be used for prevention as well as detection then there is huge potential for the test.

It is certainly true that if I had dumped the stock a couple of years ago and put into one of my other holdings I would have done much better. In two years it is up 9.87% ex divis (my worst holding over that time frame). The next “worst” performer of my current holdings (note not holdings that I held two years ago) is Boohoo (LON:BOO) which is up 78.5% in two years. Unfortunate I did not know that at the time :-).

However I will give your point consideration. All my holdings have to contribute and maybe it is time to reduce and allocate it to something else.

Michael

Shrubby

re £NANO The bulletin boards are full of ill informed guesswork. i've owned Nano for years on a mistaken speculative punt, it just looked so clever ! If i recall they were spun out of Manchester Uni. They produce cadmium free quantum dots. Try looking them up, you need a brain like the Tefal man to understand the product but essentially these are the tiny things that make QLED tv's and screens brilliant, but these....tantaraaah...have no cadmium.

Samsung (who have a track record for being naughty) look like they might have infringed the patents. This is a newish CEO.

My guess is the content of the the RNS, which I don't think they were obliged to release, was mostly directed at Samsung negotiation , not informing the market.

This share is now a gamble on whether they win the case or not. Win: it's a 10 bagger probably in October but maybe up to 2 years time. Lose...it's worthless. Previous CEO banked a pretty penny, then got out.

So pure gamble. One of those you hang on to as a constant reminder of how stupid you can be....but then again...............

OldSchool05

Thanks very much for your reply. Bioventix (LON:BVXP)

I listened to Peter Harrison tonight on Mello and it looks like their position in troponin is purely related to a commercial agreement with Siemens, as opposed to across the entire market of medical service providers. He mentioned that they "transferred the cells" to Siemens and will only take a royalty. So it is a pure royalty revenue stream for them.

Their hope is this will be over £1m annually by the end of the year. Potentially significantly more due to other uses for the testing (i.e. not just on heart attack patients).

"Is there any reason you assumed zero growth in Vitamin D"
Management have been saying for a few years now that growth will plateau.

---

"net PBT margin of 79% any increase/decrease in sales assumed has significant effect on PBT."
Yes, the margins are fantastic, but I'm more interested in cash generation relative to the market cap.
Cash generation of £7m-8m is wonderful, but imagine the company was worth £1b. Would you still want to own it? What if it was worth £500m?

For me, £217m is too high a price to pay for something making £7m-£8m.

"potential addressable market for an assay according to finnCap might be 740 million people"
This might be true, but from memory I believe Troponin sales are going much slower than management originally hoped for. As I said, I'd certainly be more interested if those troponin sales numbers started to go up quicker. It's a shame they don't itemise sales by product in their interim results.

"Do you mind sharing where you got the table from?"
There was a caveat at the bottom of my post indicating that these were my forecasts.
I can tell you now that it's going to be wrong, but I wanted to have an idea of what sales would look like if trends continued, NT proBNP revenue went to zero and Vitamin D revenues did actually plateau as management keeps saying they will.

Here's the entire P&L, but again please note that these are my forecasts only:

Cheers

sharw

abtan - your doctor friend would not have heard of Bioventix (LON:BVXP) because they supply the people who provide the machines in hospitals that process and analyse the samples. For the troponin test the partner is Siemens Healthineers so it will be used in the places with those machines. According to finnC they are second to IVD market leader Roche. Once a hospital has gone for a Roche or Siemens or whatever machine they are likely to be stuck with it for a long while.

That £1m run rate (presumably for the end of the calendar year?) is really interesting to hear, thank you.

I just posted my forecasts for Michael, but based on this new run-rate I'm going to assume £1.5m Troponin sales for 2021-22 and then 30% CAGR to 2026 (and the other products continued at their current run rates.)

2026 PAT = £10.1m

Still too low for me sadly, but much better than I was anticipating 10 minutes ago.

For reference here is how things would look if Troponin revenues doubled every year from 2022-2026 (and the other products continued at their current run rates.)

That looks much nicer.

PAT = £26m

Fingers crossed for that run-rate.

Hi Sharw

I wasn't surprised that he hadn't heard of Bioventix, I was surprised that he said there were a number of companies out there competing for the same thing, when everything I had read (mainly on investor websites) implied that the Bioventix (LON:BVXP) product was unique.

There are plenty of articles out there professing the efficiency of the Abbott/Beckman/etc... tests, eg https://jlpm.amegroups.com/art... [EDIT: and I have no idea what any of them mean.]

I simply wanted to raise the point about competition that never seems to be addressed whenever £BXVP comes up here. It may not have competition with Siemens, but Siemens does have competition.

Thx. Very interesting.

Thank you for all the above.

With regard to the table it was the breakdown of the sales by product, as it was not something I had seen before.

I will certainly do some work based on these based on what OldSchool05 said Peter Harrison said at Mello.

Still remain to be convinced that a PE of 30 is too rich for the company.

Boon

I am also torn on Cerillion (LON:CER) as recurring revenues are low, but then their typical clients at sticky (10+ years) and if you look at their annual report presentation, 80% of revenues last year were from existing customers. Of which the vast majority was new "sales", not maintenance.

Can they keep selling more to existing customers? Surely there's a limit of what's in the portfolio that existing customers will buy? Or is it not licenses/software, but services they're procuring (i.e. consulting, integration, bespoke software coding, etc)

Also, while the gross margin is high, 74%, if you track the operating costs it has grown steadily over the years. Less than revenue, but not much less, so the operational gearing to EBITDA is much less than one would expect with 74% headline gross margins.

I believe the story, the balance sheet is OK, management look safe (but not outstanding), and there is a big opportunity IMO as they have cracked global. But price is a little high for me for a company that drives lumpy contract revenues, and where revenue is mostly one-off still. So its going on the watchlist, for a good entry point.

I note that the big seller in the last two years, was one of the original founders, selling out of his stake completely. Also, he's still working as the Director of Strategic Accounts. Presumably he doesn't see many more large Telcos globally that would take up their software?

ISAallowance

Yes, Siemens has competition, but it is the second largest installed base of diagnostic machines worldwide (after Roche), and Bioventix (LON:BVXP) is the exclusive provider of the HS Troponin assay to all those machines, and any additional Siemens machines installed, probably for as long as HS Troponin is widely used. Plus they also seem to get a HS Troponin royalty stream from the Beckmann Coulter machines as well.

The HS Troponin rollout is essentially an unstoppable force IMO. It has taken a long time (and longer than BVXP had thought based on their past statements), but it's not simply a case of simply putting a HS Troponin assay in the machine instead of a standard one, or any of the other heart attack assays. The numbers returned are different, the protocols involved are different, and switching over is the sort of thing that happens at an NHS trust level, with the entire trust or local area switching at once after education of all the physicians to the new protocols, etc. Essentially the rollout will happen, and appears to now be happening at pace, HS Troponin 120k in 2019, 330k in 2020, and 280k already in H1 2021 (free Finncap paid note out today, which has that number that they omitted from the RNS).

The projection from the regular HS Troponin rollout is eventually £3m - £3.5m pa per Finncap. I've always thought this was in the bag for years now, just a matter of time. What I found really exiting in this RNS, the Finncap note and the Mello interview was the possible extension of HS Troponin use, ironically being pushed by a Siemens competitor (Roche, the largest diagnositc player). Where Roche gets the protocols approved, all the other manufacturers will follow, and if all the projected uses play out, that could potentially be £20m or so of HS Troponin revenue. A long enough growth runway to feel less giddy about the current price, certainly.

Additionally, they always talk about VitD plateauing, etc, but I think that without lockdown we would probably have seen further growth both in H2 last year and H1 this year. The Siemens Q1 report is recently out, and they are reporting strong growth in diagnostics now vs. the depressed levels last year, both in their COVID testing which BVXP does not benefit from, but also from core testing. My feeling is that diagnostic testing is likely to be a long term secular growth market for many years to come.

I hold BTW, for about 5 years now. My main concern is the clear key-man risk in Peter Harrison.

30th Mar '21

Thanks ISAallowance.

I don't usually read research notes, but I found your comments insightful enough to download the Finncap report.

I'm going to break down my responses for ease.

1 - Finncap Revenue Estimates

FYI Finncap's FY21 H1 Troponin revenue of £280k is highlighted as an estimate.
I still don't understand how they would know this number.
The company aren't legally allowed to give them any more information than we are given.
In any case, it's the future that's important, which leads me to...

2 - HS Troponin rollout is eventually £3m - £3.5m in 2025 (Finncap)

Plugging in this £3.5m (and assuming all other trends continue) gives me a PAT of c£9.5m in FY26.

That still seems quite rich for me unfortunately.

3 - "Where Roche gets the protocols approved, all the other manufacturers will follow"

This would definitely be a game changer.

May I ask where the £20m future Troponin annual sales you mentioned came from?
Was it a rough £3m x7 assumption? Or was a mention made in Mello tonight?

It would also be really good to understand what sort of timeframe that might fit into.

On a similar note I still don't understand why a new, more efficient test might not come out in the next, say, 10 years, thereby reducing demand for Bioventix's product.

4 - Siemens's Q1 Growth

Note that Q1 for Siemens, according to Finncap, is 4 months long (Sep-Dec???) and that growth is returning to normal.

gus 1065

RNS this Morning (30/3) confirming Oxford Nanopore’s intention to IPO in Q2 2021.

https://www.investegate.co.uk/...

Ip (LON:IPO) comments it’s current 15% share in ON is valued on its books at c.£340m implying a valuation of ON in total of about £2.9 billion. Market price talk for ON is considerably higher - like £5bn++ so considerable potential for upside. Perhaps Neil Woodford wasn’t quite so wrong about everything after all!

Gus.

Hi Abtan

"May I ask where the £20m future Troponin annual sales you mentioned came from?
Was it a rough £3m x7 assumption? Or was a mention made in Mello tonight?"

It was just a rough £3m x 7 assumption I made. I didn't really catch all of the Mello interview very well, was trying to cook at the same time, need to watch the replay when it comes out.

"It would also be really good to understand what sort of timeframe that might fit into."

I have no idea. My hope is that it means that Troponin growth doesn't stop once we reach full switch-over of the current test types, meaning that there is some growth further into the future.

"On a similar note I still don't understand why a new, more efficient test might not come out in the next, say, 10 years, thereby reducing demand for Bioventix's product."

Yes, this is a very real concern for me.

Realistically, I agree with you that Bioventix (LON:BVXP) is expensive now. In the 5 years I've held it I've had both P/E expansion and strong VitD growth. Realistically P/E expansion is likely done (or could even reverse), and growth could be slower. I wouldn't buy more at the current price, but I'm struggling to find quality alternatives at a cheaper price so I'm in no rush to sell either.

Small Cap Value Report (Mon 29 March 2021) - NANO, ELCO, CER, BVXP

Nanoco (LON:NANO)

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Paul Scott

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