The Woodford Patient Capital Trust published its latest update this week. In noting that the trust had increased its holdings in Allied Minds (LSE: ALM), 4d Pharma (LSE: DDDD) and Midatech Pharma (LSE: MTPH), the update said that these purchases were made “at what we consider to be share price levels that profoundly undervalue the long-term commercial potential of these young businesses”.
Index: FTSE 250 — Share price: 399p — Market cap: £860.4m — Proportion of company owned by Woodford Asset Management: 29.1%
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Allied Minds is a science and technology development and commercialisation company. The company forms, funds, manages and builds businesses, based on innovative technologies developed at leading US universities and research institutions.
According to its latest trading update, Allied Minds has a portfolio of 23 subsidiary businesses and “exciting collaborations with industry leaders such as Bristol-Myers Squibb, Intel, AMD and Google”.
At the same time as Woodford was upping his stake, his team noted that “the market appears to be struggling to place an appropriate value on this young technology business”.
I can see why. Companies with no earnings are often valued on the their price-to-sales (P/S) ratio, but on this measure Allied Minds is profoundly overvalued. Revenue for the last calendar year was $4.7m (£3.2m), so with a current market cap of £860.4m, we’re looking at a ridiculously high P/S of 269.
Turning to assets, Allied Minds still appears to be on a very rich rating: five times book value, based on the last published balance sheet (30 June 2015) showing net assets of $270.4m (£172m). A US short-selling hedge fund, in a research report that was of course slanted to its own agenda, did, however, calculate net asset value (NAV) based on Allied Minds’ own higher valuation of its assets. This worked out at $631m (£401m) — so, the company is currently valued in the market at more than twice that implied by the management’s own valuation.
Allied Minds said in its trading update last month that management’s valuation for 31 December 2015, “while still being finalised, is expected to be comfortably ahead of the prior year”. Even so, that sounds like the current share price still represents a hefty premium — which, on the face of it, doesn’t seem a profound undervaluation of what is a portfolio of largely early-stage, illiquid and opaque assets.
Index: FTSE AIM 100 — Share price: 850p — Market cap: £550.6m — Proportion of company owned by Woodford Asset Management: 24.1%
4d Pharma is developing therapeutics based on live bacteria. The company has earned no revenue to date, recently acquired another interesting (but also early-stage) business, and had net assets of £66.6m (£61.5m of which was cash) at 30 June 2015.
If you purchased the whole company today at the current share price, your cash of £550.6m would essentially buy you cash of £61.5m, a few million intangible assets and a lot of hope that Woodford is correct in believing this represents a profound undervaluation of 4d Pharma’s commercial potential.
Index: FTSE AIM All-Share — Share price: 156.5p — Market cap: £52.4m — Proportion of company owned by Woodford Asset Management: 20.0%
Nanomedicine company Midatech Pharma had net assets of £37.1m at 30 June 2015, so the shares are trading at 1.4 times NAV, which compares favourably with 4d Pharma’s 8.3 times NAV.
Midatech also boasts some revenues, having brought in £0.4m over the 12 months to 30 June. A leap to over £8m is forecast for calendar 2016, with around £14m currently pencilled in for 2017 — which would give a not-outrageous P/S ratio of 3.7 at the current share price.
At the end of the day, though, I have to say that these kind of ‘high hopes’ businesses don’t really appeal to me — even if the redoubtable Mr Woodford reckons their commercial potential is profoundly undervalued.