HYBRIDAN SMALL CAP NEWS

HYBRIDAN Market Comment

The View from the Broker’s Desk

One size never fits all

The role of a corporate broker is not only to marry issuers and investors, but also to demystify market sentiment to exciting growth companies who are considering utilising London’s junior markets such as AIM or AQSE to take their business to the next level.

Whether you pick up the paper and read the report by The Tony Blair Institute proposing AIM should be collapsed or the IHT and CGT changes from the Budget – you would be forgiven for thinking that the junior markets are not as welcoming as they once were.  The reality is this couldn’t be further from the truth.  Especially if you are VCT or EIS qualifying – there is a plethora of institutional backers that are always on the lookout for exciting growth companies.

The challenge remains – and where significant reform is needed – for those companies who do not qualify for VCT or EIS relief and who are under £100m market cap.  First, it’s important to define the audience I am referring to and I think it’s largely semantics that is confusing the issue whether its small, micro or nano.  Broadly it is the sub £100m market cap arena that continues to struggle.  Even more importantly, the sub £50m market cap universe.

The Government has pledged £7.3bn in funding for a National Wealth Fund to attract private investment into UK infrastructure.  Energy Security and Net Zero Secretary Ed Miliband said, “Our National Wealth Fund will help create thousands of jobs in the clean energy industries of the future to boost our energy independence and tackle climate change.”  This is certainly a push that is drastically needed, but I am not convinced one penny of that capital will assist the £10m market cap engineering business in Hull to raise money to fund an acquisition, which has received years of fund manager feedback that they are “sub-scale”.

In a similar vein, Legal & General’s plans to launch a new fund that is aiming to invest £400m in British businesses by the end of 2025.  The group is targeting £1bn worth of investments made by the end of next year for its Private Markets Access Fund, with up to 40% allocated for UK firms.  According to the L&G website, the fund will be allocated to 15% Private Equity, 18% Private Credit, 19% Private Infrastructure, 23% National Resources, and 25% Private Real Estate.

Again, a very noble move in boosting our economy, but the argument remains the same, none of this new pool of capital will support companies such as a £30m market cap growing tech company.  We need to be creating new pools of capital and directing it to those most in need rather than directing more money to areas which you can argue have plentiful financing options already.

The only real source of finance for sub £50m market cap companies (if you are lucky enough to qualify) are the EIS/VCT investors who make the UK one of the best destinations in the world for funding exciting early growth companies.  IP rich companies can enjoy up to £20m under the scheme to help them grow.  AIM and AQSE continue to be great homes for qualifying companies to raise money under these tax efficient schemes.

The real challenge is for sub £50m market companies who are not EIS/VCT qualifying.  There are only a handful of funds left out there that have the flexibility and discretion to venture down to this end of the market and it is only getting worse.  “Compliance Led Fund Management” is a phrase frequently heard.  In a bid to service any fund redemptions, liquidity is increasingly prioritised over fundamentals of a company.  Ie, a company could be trading on a PE of 3x, but if the company only turns over (in absolute trading amounts) £10k a day, for some fund managers it’s difficult for them to deploy meaningful sums as if they have to sell, it would be hard for them to unwind their position quickly and close to the market price given the liquidity of the company.

At the hard coal face of UK small caps, we need more closed end investment fund structures or Government backed entities such as British Growth Fund who are free from the shackles of constant redemption threats where seasoned small cap fund managers have more flexibility to back the FTSE winners of tomorrow.

Before we come up with a viable solution, we must all be on the same page on the understanding of the problem.  The proposals can’t be “one size fits all”.  The challenges in making the UK the listing destination of choice for the next multi £bn IPO are worlds apart from the challenges facing the CEO of a £40m market cap company that is not VCT qualifying.  Whilst the latter may not be as “newsworthy” as the next blockbuster IPO, it would be a fatal error for our small cap ecosystem if they are to be ignored.

By Niall Pearson

Newsflow

Deeper Reflections on recent Corporate News

IUG:  Simulation Game On

PRES: Increasing Impact

ZIN:   Camera Action

Alphabetically arranged

Share prices and market capitalisations taken from the current price on the day of publication

Intelligent Ultrasound Group 11.5p  £34.9m (IUG.L)

Source: Alpha Terminal

This ultrasound AI software and simulation Company completed the sale of its Clinical AI Business. The Clinical AI related assets have been sold to the mighty NASDAQ listed GE HealthCare for an enterprise value of £40.5m on a cash free/debt free basis equating to 12.4p per share valuing the remining business at less than nothing.

The disposal excludes the NeedleTrainer product range which is part of the remaining Medical Simulation Business. It been developed over the years and includes ScanTrainer obstetrics, a new release Bodyworks Eve and a gynaecology training simulator. IUG’s business generated revenues of £10m in the year to December 2023. Cashed-up management are reviewing the Simulation training business and evaluating the growth potential and the capital requirements of achieving breakeven. The Simulation market was valued at $1,687m in 2020 and is projected to reach $6,688m in 2030, as reported by Allied Market Research.  The main shareholders and directors own a combined 66%.

Assuming some funding for the Simulation business from the £40.5m of proceeds of sale, the Board intends to make a material tax efficient return to shareholders.   Further news is expected on their investment plans and distribution after the capital reduction is confirmed by Court Order on Monday 18^th November.

Comment:  The simulation business has no implied value and the wait for the terms of the cash be known.

Pressure Technologies 34p £13.2m (PRES.L)

Source: Alpha Terminal

The strategic focus in on Chesterfield Special Cylinders (CSC) after this specialist engineering group completed  the sale of PT Precision Machined Components in October.   The division was sold to an Indian manufacturer for an initial enterprise value of £6.2m, with a further £1.5m related to performance.

CSC has over 100 years history of building high pressure gas containment cylinders.   It claims to be one of five global companies able to deliver ultra larger cylinders. Its traditional markets are oil and gas and industrial, but with increasing interest from the defence and hydrogen energy sectors. It recently won a significant contract to supply air pressure vessels to the Royal Canadian Navy’s River class destroyer programme. The £2.8m covers the first three ships in the fifteen-ship programme and the initial manufacturing milestones will commence in May 2025 and pressure vessels for the first three ships will be delivered to the programme over the next 5 years. This underpins CSC’s global defence order book development for FY25.

The Interims to June 2024 suggest that action was needed, with a Loss before Tax of £1.2m on revenue of £15m. The receipt of the £4.8m cash proceeds at completion of the sale of PT Precision Machined Components repays a £1m loan and the net borrowing, excluding asset finance of c. £0.9m, leaves net cash of £2.9m.   The remaining cash is to invest in supporting CSC to pursue hydrogen energy and defence market growth opportunities. The Recent Trading update for the finals to September 2024 showed a reduction in EBITDA expectations for the continuing actives to c. £0.9m, giving an EBITDA /EV of just over 10x for the current year.

Comment:  A moderate recovery rating, which is currently not anticipating any CSC growth.

Zinc Media Group  62p  £14m  (ZIN.L)

Source: Alpha Terminal

Since reporting its Interims to June 2024 in September,  there has been corporate actions and business development activity at this television, content and audio production group. The interims to June were disappointing with an EBITDA loss of £0.9m reported on revenue from continuing operations of £14.1m. A stronger H2, and an EBITDA profit of £2.1m is expected for the Y/E December 2024. The Company recently reported that two of its popular series have been recommissioned and are worth £4m. One in production is a new 80-episode series of Bargain Loving Brits in the Sun for Channel 5. A second series of Rob & Rylan’s Passage to India is moving into production. There is also a multi-million-pound commission from the documentary division of a global streaming platform. Another new contract is a biopic for one of the biggest pop bands of the 20^th Century. The editorial details however are being kept confidential, but the revenue is included for the current year. The Company is selling the remaining non-core legacy loss making tele-sales contract publishing business, for a cash consideration of £100,000.

Further corporate action is the seemingly astute acquisition of Raw Cut Ventures Ltd, founded in 2002, for net £1m in share. The Company owns Raw Cut Television, Raw Cut Distribution, and Tomas TV, an independent television production and distribution company. The Company also produces ‘Blue Light’ programmes such as Road Wars and Police Interceptors as well as critically acclaimed True Crime, History, and Feature Documentaries for leading streamers and broadcasters including Netflix, ITV, Channel 4 and Channel 5. Zinc Media has long standing relationships with the UK’s police and emergency services, which are integral to its ongoing success. In the year ended December 2023, Raw Cut revenue was £4.4m with a PBT of £0.4m and net assets of £1.6m. For the year ended 31 December 2024, Raw Cut is expecting to deliver £4.6m of revenue and PBT of £0.5m. The earnings enhancing acquisition will also enhance Zinc’s IP catalogue and distribution. At the interims, there was cash of £4.1m and further funding would be needed for acquisitions in our view.

Comment: There is a large market for quality TV, not fully reflected in acquisitive Zinc Media’s share price.

House Report

News from a house stock 

Sareum Holdings  26p £32.4m (SAR.L)*

Reported Finals to June 2024 and Fund raise post period

Hybridan’s Comment:

The success of the Phase 1 trial attracted further investment so that there are sufficient funds in place to progress value adding studies. This will help to build the data package to facilitate engagement with potential licensing and commercialisation partners.

The Finals to June 2024 reported increased operating losses at £4.6m (FY23: £4.0m), mainly reflecting the continued higher level of R&D investment which successfully saw the Phase 1 clinical trial of SDC1801 complete, its lead candidate, in the autoimmune disease programme. The next development stages could be less costly as no clinical trials are currently scheduled, we therefore anticipate a reduced operating loss for June 2025 with net cash of c. £1.9m.

The focus remains on developing the next generation of JAK kinase inhibitors through additional development work. Sareum intends to position its lead drug SDC-1801 as a best-in-class TYK2/JAK1 inhibitor for autoimmune diseases. The initial focus on psoriasis, a skin disease affecting over 60 million adults worldwide represents a market opportunity exceeding $30bn.

Since the year-end, £3.4m was raised at an aggregate price of 20.1p, and additionally the Company received a A$1.9m (c. £1m) tax credit from Australia for running the Phase 1 clinical development. Combined, this funding allows the accelerated development of SDC-1801, to prepare the asset for Phase 2 clinical trials.

SDC-1801 is due to start the longer-term toxicology studies needed to support these clinical trials in patients. Its successful completion would represent a significant milestone and so substantially enhance its potential value for licensing deals with large pharma companies.

* A corporate client of Hybridan LLP

Notable Events and Upcoming Results

Below we consider notable updates and anticipated events

There are plenty of updates being made to our acquisitions spreadsheet over the past month, including these below.

Gooch & Housego 428p  £107m (GHH.L)

This specialist manufacturer of optical components and systems announced that it has acquired UK-based Phoenix Optical for up to £6.75m. This acquisition extends G&H’s precision optics capabilities in its Aerospace & Defence markets and creates new opportunities for the cross selling of the combined capabilities. Phoenix supplies polished, coated and assembled precision optics internationally and has one of the largest diamond turning facilities in Europe. The combined group has complementary specialist capabilities in precision optics, so can serve a broader customer base with a comprehensive portfolio, whilst achieving synergies from sharing manufacturing capacity and optical systems engineering expertise. Its results for the year ended 30 September 2024 are due on Tuesday 3 December 2024.The Company has said that trading levels improved during the second half of the year and it expects the Group to deliver full year revenue and adjusted pre-tax profit in line with current market expectations.

SDI Group  53p  £55.4m (SDI.L)

The buy and build group focused on companies which design and manufacture specialist lab equipment, industrial & scientific sensors and industrial & scientific products announced, what is expected to be, an earnings enhancing acquisition.  The net consideration for InspecVision is £6.1m. InspecVision  is a designer and manufacturer of computer vision-based measurement systems for industrial applications. InspecVision was profitable for the Y/E December 2023, with an adjusted EBIT of £0.84m on revenue of £3.2m. It is focused on the high value metrology market and has a blue-chip international client base with US exposure providing cross-selling opportunities. The acquisition brings into the combined group new technological capabilities including AI and machine learning, and strong IP, which can be leveraged. The management consider this acquisition to be a rare opportunity to capitalise on future growth in the metrology market.

Venture Life  42p £53.4m (VLG.L)

The developer, manufacturer and commercialiser of products for the international self-care market, acquired Health & Her Ltd, a specialist female health business founded in 2018. The upfront cash consideration is £7.5m with a further £2.4m payable 12 months post completion, dependent upon certain KPIs and trading results.  The focus is on the transitional elements of hormone health, providing supplements and digital support for the female hormonal health journey. The menopause and peri-menopause products currently constitute most the business’s revenue.  The global menopause market was estimated by Grand View Research at $16bn in 2023 , but Forbes Magazine estimates it to rise to $600bn by 2030. Revenues for the financial year ended 31 May 2024 were £6m, with a loss before tax of approximately £0.4m. The VLG Board believes that the historic profitability of the business was significantly impacted by costs invested to build awareness of Health & Her’s brand and to develop best in class technology solutions to reach its consumers. Venture Life will invest to drive the growth by expanding its reach and generating synergies with its current portfolio and operations.

Companies we are interested in with results in the next month

Intercede  194.5p £114.2m    (IGP.L)

The cybersecurity software Company specialising in digital identities will report Interim Results to September on Tuesday 26^th November. It expects revenues for H1 FY25 to be around 22% £8.54m. This is in line with management expectations.  There is no debt and the cash balances of £16.2m compared to £9.7m.

Northern Bear  55p  £7.6m   (NTBR.L) *

A group of companies providing specialist building and support services will report its interims to September on Friday 29^th November. In a trading update, management confirmed trading continued to be in line with management and market expectations.

Vianet 114p  £35.5m  (VNET.L)

The international provider of actionable data and business insights through an integrated ecosystem of connected hardware devices, software platforms and smart insight portals announced a trading update, and notified the market that it will release its results for the six months ended 30 September 2024 on Tuesday 3rd December.  The trading update stated that revenue growth in H1 2025 increased to £7.69m, up from £7.19m in H1 2024, the adjusted Operating Profit rose 10.1% to £1.43m and the Company expects to report a reduced net debt of £1.0m and cash balances increased to £2.25m from £1.32m.

* A corporate client of Hybridan LLP

By Jon Levinson

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