Hybridan Monthly with Master Investor
Market Comment
The view from a Broker’s desk
2024 IPO Activity: New entrants down, but amount raised up!
The annual EY Global IPO Trends report produced a welcome surprise in their year-end edition for 2024. Whilst EY reference the widely documented news of the amount of companies delisting from London markets across 2024 (88), the welcome fact was that the proceeds from IPOs actually tripled year-on-year, reaching £3.4bn. This is split across the 18 listings across the Main and alternative markets in London last year, 22% less than in 2023 and 60% less than in 2022, according to figures from EY. A notable contributor to these numbers was French media group Canal+ raising, £2.6bn in the largest London Stock Exchange debut since 2022.
Declining liquidity, low valuations, and high regulatory burdens were the usual reasons touted for companies looking to flock to pastures new, some being to the US. As we have previously outlined, it’s important to take this criticism of the UK with a pinch of salt a la Just Eat (JET.L). Just Eat shares are down circa 85% since their February 2020 IPO. Their latest Q3 trading update showed sluggish performance in the US, missing market expectations and total gross transaction value was also down in quite a saturated market.
The grass is most certainly not greener across the pond, especially for small caps. Last year, NASDAQ told UK biotech Renalytix (RENX.L) it was not in compliance with the requirement to maintain a minimum market value of listed securities of $50m for continuing to be listed. The unpopular opinion is that the terrain for sub £1bn market cap companies is harder than it is here in the UK which could explain the flurry of successful US companies venturing over to UK soil to IPO in 2024 such as AOTI Inc (AOTI.L), MicroSalt (SALT.L) and Helix Exploration (HEX.L).
Looking ahead, we have cautious optimism and believe the theme of 2024 will continue into 2025 that is “less is more”. Fewer companies listing, but quantum of proceeds going up representing larger and more established businesses looking to IPO. The mid-tier lender Shawbrook has its eyes set on London with a possible £2bn IPO later this year which would help rejuvenate sentiment in the primary markets.
The importance of high quality IPOs was summarised in Whitman Howard Asset Management’s excellent research into the IPO blueprint. The investor analysed data on eleven years of IPOs on the LSE to identify common trends amongst the top performers. Some key themes observed include: starting off with a sub £250m market cap (sensible valuation to allow for upside); founder run; and no private equity running for the door at IPO. Valuable lessons for investors to keep in mind when the IPO windows open.
Happy New Year from all the team at Hybridan.
By Niall Pearson
Newsflow
Our deeper reflections on recent corporate news
ADS Certainly Unknown
RUA Manufacturing Success
Adsure Services 22.5p £2.38m (AQSE: ADS)
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Price |
Results |
Largest Shareholders |
Value |
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20-25p |
Y/E: March |
Andrew Townsend 26.31% |
Recurring Revenue |
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Spread: 25% |
Report July |
Derek Joseph and also Ian Sharp both at 11.50% each |
Benefits from Uncertainty |
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52 week High/Low: 42.5p/15p |
Interims: Sept, report December |
Richard Wollenberg 8.61% |
Organic Growth
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Jeffrey Zitron and also Julian Ashby both at 8.52% each |
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Peter Hammond 6.24% |
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Andrew Fife 5.77% |
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Source: Alpha Terminal
This is a specialist business providing assurance (confidence, certainty) services which listed on AQSE last year. It operates across the Housing, Healthcare, Government, Education and Charities sectors offering a wide range of ‘sticky’ services. These include internal audit, anti-crime, security management, IT audit, cyber assurance and advisory and are tailored to align key economic and business risks that impact clients. There are two operational divisions, Risk & Assurance and the long-established Risk & Advisory. The recurring revenues from government funded organisations is 85% and the contracts are typically 2-5 years.
The Interims to September reported a 19% increase in Revenue to £5.1m, its EBITDA jumped to £0.55m against £0.16m with PBT of £0.33m from a £0.3m loss. This is evidence of the success of the new sector led approach and investments made in upgrading and maintaining digital connectivity. The finals to March 2023 also reported improvement with £9.3m of Revenue and a 72% increase in PBT to £0.45m with an EPS of 3.6p giving an historic P/E 6x with a 4.8% yield.
It listed at 45p without raising funds and 87% of the shares are with shareholdings above 3%. The listing is to accelerate growth into new territories and services with upgraded technology. It was awarded an Innovate UK grant to develop AI capabilities to assist clients with improved service delivery and maximise data use. The AI project is part of TIAA Insight and is being launched to bring efficiencies to working practices with the potential for developing licenced software revenues. Net cash increased to £0.77m from £0.37m allowing a 60% increase in an Interim Dividend to 0.786p per share. The second half has started positively, and the CEO is seeing strong momentum.
Hybridan Comment: The value is perhaps hindered by lack of liquidity as its free float is just 13% and the current spread is 25%, but value will usually be recognised.
RUA Life Sciences 13.00p £7.6m (RUA.L)
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Price |
Results |
Largest Shareholders |
Value |
|
12.5-13.00p |
Y/E: September |
Dowgate Capital 12.25% |
Strategy Traction |
|
Spread: 4% |
Report June |
Hargreaves Lansdown 10.84% |
Organic & Acquisitive Growth |
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52 week High/Low: 15p/8.64p |
Interims March, report January |
Interactive Investor 7.68% |
£3.8m cash
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Rathbones 6.52% |
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Mr Clive Titcomb 6.49% |
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AJ Bell Stockbrokers 6.15% |
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Source: Alpha Terminal
RUA Life Sciences’ development strategy was recentred last year on two key deliverables: leveraging its IP and advancing subcontract manufacturing specialist medical devices and components. It raised £4m at 11p, in November 2023 to achieve profitability by commercialising and reducing R&D costs and expanding contract manufacturing. The astute Abiss acquisition in early September doubled manufacturing capacity and the interims showed reduced costs.
The Interims to end September 2024 reported a 92% increase in revenue to £1.5m, although the previous year had been adversely impacted by supply line issues. The GP margin increased from 78% to 83% and the reported profits are £631k, or a loss of £425k after deducting the £1m profit from the acquisition’s assets, which has been included. It is anyway a significant improvement from the comparative year’s £1.3m loss and reflects a 16% reduction in administration costs.
There are four business units with RUA: Contract medical device manufacturing is the largest with sales increasing 116% to £1.2m. RUA Biomaterials are materials implanted in a body such as pacing leads; its revenue increased 19% to £238k. The RUA Vascular and RUA Structural Heart units are pre-revenue, but seeking licensing deals. The Company internally developed Elast-Eon polymers which are now widely accepted as being the most biostable of all polyurethane materials and as such are being used in long term implantation. Elast-Eon polymers will enable the next generation of cardiovascular medical devices. The development strategy is focused on licensing or commercialising the existing IP, within budget, to accelerate cash generation.
In September 2024, Abiss Group, a medical device manufacturer based in France, was acquired for just £68k from its parent company’s administrators. It was introduced to RUA by a client keen to ensure continuity of supply. It will be merged into RUA’s Medical Devices and Components business unit and double its scale with opportunities for further growth. Abiss has a market position in Stress Urinary Incontinence and pelvic floor repair which could use Elast-Econ polymers. Abiss seems a bargain buy as it was acquired with tangible assets, little debt and an Euro 900k order backlog which is being delivered. A very going concern!
The Financial Y/E is being changed to September to suit the deal, so the next report will be unaudited second interims or the 12 months to March 2025, which are likely to be in June. These should show operating at break-even and with the windfall going concern asset revaluation from the Abiss acquisition of circa Euro 2.65m of gross assets (as at December 2023). The net cash is £3.8m which should achieve sustainable profitability with room for further selective acquisitions.
Hybridan Comment: The revenue growth and astute acquisition make the shares seem undervalued.
House Report
News from a house stock
Zentra Group* 4p £1.55m (AQSE: ZNT) (Formerly One Heritage Group)
A new journey is under way for 2025, after being transferred onto the AQSE Growth Market. Zentra will focus on high-quality residential apartments and housing developments, while seeking strategic partnerships to build houses for local authorities and housing associations. There are two brands: Zentra Living which is delivering modern, vibrant residential apartments aimed at professional urban dwellers; and Zentra Homes providing family houses.
The sale of a £7m portfolio completed post the June 24 Y/E was mainly residential, but included a commercial property. The asset sales reduced debt, helped improve the financing terms and strengthened its balance sheet. Further actions also helped to reduce the interest burden and increase financial flexibility as the Loan Terms were improved and extended. An 18 month £1m working capital facility has been negotiated that can be drawn down as required. Revenue is being generated from a service agreement and sales commissions.
The funds are being invested in building the pipeline of residential development projects in the North of England. A conditional contract has been exchanged for the sale of land for £0.4m which is subject to the buyer obtaining planning approval which is expected in Q1. Zentra recently acquired a 30% stake in the One Victoria project in Manchester for £3m where they are also the project’s development manager. One Victoria is a high-quality residential and commercial development, consisting of 129 apartments and two commercial units with a Gross Development Value (GDV) of £39.5m. It is scheduled for completion in the summer of 2025.
Hybridan Comment: Management is working to restore profitability and increase shareholder returns. The Company should have sufficient funding to make tangible improvements for the Y/E June 2025.
Updates/Events
What we consider to be notable updates and anticipated events
Intelligent Ultrasound 12.70p £42.2m (IUG.L)
We mentioned this company in our November 5th 2024 edition of Hybridan Monthly with Master Investor when it was at 11.5p and anticipated a cash distribution from last year’s £40.5m disposal of its clinical image analysis software to GE. The investment icing on the cake was the IP, and the listed remaining business was in the price for less than nothing. A buying opportunity too good to be true for any acquiror. The news is that Surgical Science Sweden AB is buying the cash and business in a recommended offer valuing it at £45.2m on a fully diluted basis which is 13p a share. It’s a very good deal….. for Surgical Science.
Hybridan Comment: There is no point getting too upset as there is still a (small) profit for investors in IUG.
IXICO 12.00p £11.12m (IXI.L)
A commercial agreement was announced on 16 December by this neuroscience company with a subsidiary of Siemens. It has recently launched the next generation AI-driven platform which advances therapy research in neurological disorders. The agreement is with PETNET Solutions Inc, part of Siemens, who will initially supply diagnostic imaging agents. The enhanced platform accelerates IXICO’s expansion strategy to serve its growing customer base with the latest technologies in neuroimaging.
Its customers are large pharma and biotech companies who can remotely access the platform for clinical trial support and insights helping reduce R&D risk and uncertainty, while enhancing disease understanding and drug development efficiencies. A contract was recently signed with a new US client to provide imaging services for a Phase 2 Huntington’s Disease clinical trial. Net cash at the year-end was £1.7m and since then a further £4m was raised at 9.5p, so we believe that it should be fully funded to breakeven.
Hybridan Comment: The launch of the new platform and the gathering momentum is yet to register in the valuation, which Siemens may notice.
Zinc Media Group 56.5p £13.75m (ZIN.L)
The television, brand and audio production Group trading update for the year ending December 2024 included the launch of a new entertainment television label. Revenues of £34m are expected with a 50% increase in Adjusted EBITDA to £1.5m. The increase in National Insurance contributions are expected to add c. £0.4m to the annual cost, some of which cannot in the short term be passed on. The outlook for the current year is reported to be strong with its highest-level of secured revenue currently £14m for the Y/E 2025, with a further £8m at a highly advanced stage. The new TV label is being headed by the former Executive Producer of Strictly Come Dancing and The Voice. In December, the Chairman bought Ordinary shares at 52.47p, taking his stake to 1%.
Hybridan Comment: The price drifted down from our mention at 66p in our Friday Takeaway on 20 September, but still seems worth backing.
Events
It’s a quiet reporting time, although the one below attracted our attention
Hercules Site Services 45.5p £35.83 (HERC.L)
A technology enabled labour supply group for the UK infrastructure and construction sectors reports its Finals to September 2024 on Monday 13th January next week. A record year is likely, with revenue up 24% to £105m, helped by increased water sector investment, and full year PBT of £1m for a P/E of circa 42x. The £8m placing after the year end at 49.5p will hold back EPS growth. There is also an intention to sell the Suction Excavator business, which is now a non-core activity, allowing an increased focus on the higher growth opportunities offered by UK construction and infrastructure.
Hybridan Comment: The shares seem up with events.
* A corporate client of Hybridan LLP
By Jon Levinson
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