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- First-half pre-tax loss of £1.6mn
- Fair valuation of portfolio down from £41.8mn to £35.5mn (151p)
- Post-period-end disposals improve cash position
Aim-traded investment company Netscientific‘s (NSCI:60p) headline losses mask an improving trading performance.
More than three-quarters of the flat first-half operating loss of £1.6mn was due to the consolidated losses of two subsidiary companies: Glycotest, a Philadelphia-based liver disease diagnostics company that is commercialising new and unique blood tests for life-threatening liver cancers and fibrosis-cirrhosis; and ProAxsis, a commercial medical technology company with a focus on respiratory diagnostics. Importantly, both companies are being funded by third-party sources as they move towards the commercialisation stage and do not require funding from Netscientific. Excluding Glycotest and ProAxsis, the group operating loss more than halved to £0.3mn.
Moreover, current borrowings of £1.5mn reflect the debt of the two subsidiaries. At a parent level, Netscientific had net cash of £0.3mn on 26 September 2023 and it holds 1.33mn shares worth £5.5mn (23.5p) in PDS Biotechnology Corporation (US: PDSB – $5.10), a $157mn market capitalisation clinical-stage immunotherapy company developing cancer immunotherapies and infectious disease vaccines based on its proprietary Versamune T-cell activating technology platform. The fall in PDS’s share price proved a £9.4mn drag on the portfolio valuation, but this was partly offset by net gains of £3.1mn from three other holdings: Vortex Biotech, Q-Bot and DName-IT.
The group’s 25 per cent stake in Vortex Biotech quadrupled in value to £2.8mn after the company raised £3.2mn in an enterprise investment scheme (EIS) investment round in June 2023. It was led by EMV Capital, the group’s corporate finance boutique. Vortex’s core technology allows for the capture and isolation of high-quality circulating tumour cells from blood samples.
University of Leuven spin-out DName-IT has developed a platform to avoid sample authentication errors and to correct for sample contamination in genetic sequencing laboratory tests. The company operates at the crossroads of the major, growing markets of liquid biopsy, laboratory services, clinical trials and next-generation sequencing. A recent £0.5mn EIS investment round led by EMV Capital increased the valuation of the group’s 36.9 per cent stake from £0.1mn to £1mn.
Netscientifc also booked a £0.3mn gain on its £4.1mn holding in Q-Bot, a London-based robotics and artificial intelligence company that has developed a patented energy-saving robotic system for applying insulation in tight spaces and suspended floors (to reduce heat loss and prevent draughts, damp and mould).
Hidden value in EMV Capital’s carried interests
The £35.5mn (151p) fair valuation of the portfolio is not only 151 per cent higher than Netscientific’s market capitalisation of £14.1mn, but it places no value on EMV’s capital under advisory (CUA) of £26.1mn, up from £23.5mn at the start of 2023.
EMV’s business model is to syndicate investments between financial and corporate investors, and for its management team to take a strong hands-on role post-investment. Monetisation is through a mixture of corporate finance fees, management and incubation services, and carried interests in the investments it syndicates. True, it is difficult to estimate the current value of these stakes. However, based on an average two times portfolio return on CUA, they could deliver carry returns in excess of £4.5mn (19p) to EMV, or a third of its market capitalisation.
When I suggested buying the shares, at 64p, in my 2023 Bargain Share Portfolio, I highlighted the potential to make profitable exits on the portfolio. This is starting to happen as the group has made £0.8mn of partial exits since July 2023, which provides funding and is supportive of the fair valuations of investee companies. With sum-of-the-parts valuations almost three times the current share price, the shares remain a buy.
■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
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