$NANO.L – Nanoco – some preliminary notes

I’m just assembling some notes before bedtime about NANO (Nanoco).

I has said that it was likely overpriced at 139p back in December. It has since slipped back to 106p, giving it a market valuation of £229m.

If I play just “the pricing games”, then it should be noted that many listed semiconductor companies took a decade or more to reach revenues of £100m starting out from a position that was arguably better than NANO. Return on capital was actually quite poor, and often had cumulative negative free cashflow throughout that period.

IMG, IQE and WLF have average sales of £130m, and an average market cap £270m. Purely playing a pricing game, let’s suppose those kind of numbers were feasible for NANO – in a decade’s time. Applying a reducing cost of capital from around 10.25% to 8%, I would need to apply a discount factor multiplier of about 0.4, to give NANO a value of about £110m. And that’s to say nothing about the capital
injections that are likely to be required over the next decade. NANO still looks vastly overvalued to me.

I’m putting together a spreadsheet on a DCF for NANO:
https://docs.google.com/spreadsheet/ccc?key=0AvgR2LZ8mUlDdDFWSHhrT1cyZGR4SGxXWXRMa2t6elE&usp=sharing It’s highly preliminary, and I’ve put in some known wrong values to get some of the estimates to be more sensible.

The PV of the terminal value comes out at £39m, which is considerably less than the value of £110m above. Remember, though, that the £110m is based on a market pricing guess, and I think it’s a reflection of the fact that tech is overpricing companies relative to the cashflows that they are likely to be able to generate.

The PV of the cashflows of the next 10 years came out at £-71m, implying that the company is effectively worthless: i.e. it will gobble up more capital than it will ever generate in returns. I reckon that £-71m is wrong, though. I did some number-crunching on some other companies, (I use IQE, IMG and WLF a lot, although many will dispute that they are suitable comparables), and estimated that the
total free cashflow for NANO over the next decade is more likely to be in the region of £-15m. That’s way better than £-71m; but still implies that NANO is going to be a net money-sink over the next decade. I figured that the -15m was worth about -8.4m in discounted terms.

That would put NANO on a firm-wide valuation of around £46m (£40m for the PV of the terminal value of the cashflows, £-8.4m for the PV of the net cash outflows over the next decade, plus £14.3m in cash that it has). That of course means that NANO is still wildly overvalued. A lot can happen over the next 10 years, and it’s quite possible that the valuation will increase as time progresses.

Something like NANO is an interesting share, because it’s so speculative, and I’m sure they’ll be plenty of opportunities to buy it at an attractive valuation some time in the future. That time is not now, though. We really need everyone to get fed up with tech stocks.

Also worth mentioning that is that I have just been plugging in very very crude numbers for cost of capital. I haven’t done anything about looking at possible debt/equity structure. So there’s considerable tweaking that could go on there.

Here are some stats that I pulled off, which might give some clues as to where I’m getting some of the numbers from my spreadsheet.

     OPM% Sales  LTA    NCA  CAP Sales/Cap
 ARM 21.5 715   858    497  1355   0.528
 IMG 11.9 151.4 197.8   50.2 248   0.610
 IQE  5.8 126.8 163.7    7.9 171.6 0.739
 WLF -7.0 108.7  42.4   35.9  78.3 1.388

There are many more companies that I really should be tabulating, but haven’t gotten around to yet.

OPM is Operating Margin, Sales is the revenue, LTA is the fixed assets, NCA is the net current assets, CAP is capital (the sum of LTA and NCA), and Sales/Cap it the ratio of sales to capital. The median OPM is 8.85%, which you’ll see being used in the spreadsheet (cell B24), and the median Sales/Cap is 0.675, which is also used (cell B5).

What surprised me is just how much capital is required to generate revenue. For every £1 of capital you invest, you only generate 67.5p in sales. Compare that with a company like RMV (Rightmove), that generates £140m in revenue using capital of less than £10m. Plus it has huge margins, too. But that’s a different story.

Lastly, but not leastly, I found an interesting article here: http://www.prweb.com/releases/quantum-dots-qd-market/09/prweb11144697.htm It estimates that the total market for Quantum Dots is expected to reach $7480m (£4500m) by 2022. For comparison purposes, my esitmate of revenues for NANO 2 years is around £90m, implying that NANO captures 2% (90/4500) of the market.

We shall see.


About mcturra2000

Computer programmer living in Scotland.
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