The last time I covered small-cap Nanoco (LSE: NANO), I concluded that summer 2017 would be “crucial” for the company. If management could sign a wave of deals with equipment manufacturers as predicted, I wrote, then we would have “more colour on the group’s growth potential.“
On the other hand, I concluded that if no deals emerged, it “may be a sign” that the firm’s technology is “not worth paying for,” which would be bad news for investors and the firm’s outlook.
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Six months on and it looks as if Nanoco’s outlook has improved significantly, although the company still has plenty of work to do.
Since April, it has received two substantial orders. The first came from Wah Hong Industrial Corporation, one of the world’s largest manufacturers of optical films and sheets for the display industry, for the supply of resins containing Nanoco’s cadmium-free quantum dots. And the second commercial supply order came from a medical devices firm. The products will be used in light therapy products for the treatment of pain, soft tissue injury and dermatologic conditions.
So Nanoco is making progress and management believes that the company’s outlook is improving, albeit at a slower rate than expected. New products in the pipeline should help fuel further order growth and recently-signed contracts should help spread the word about the firm’s product offering.
Still, despite the company’s steady progress, revenue and income remain elusive. More importantly, cash is in short supply, and yesterday Nanoco announced that it was going to conduct an £8.6m fundraising at 18p per share, a discount of approximately 35.7% to the closing mid-market price of 28p per share on 3 October. After this cash call, existing investors will have been diluted by around 20%.
This fundraise and dilution is disappointing, but it shouldn’t have come as a surprise to investors. Even though City analysts are forecasting revenues of £1.5m for the fiscal year ending 31 July, growing to £6m for the following year, losses are projected for the next two years at least. For fiscal 2018, analysts are expecting the company to lose £6m, consuming two-thirds of the recent cash call.
And with no profits projected for the next few years, it’s challenging to try and place a value on shares in Nanoco. Even though the company has managed to ink some orders for its quantum dots products, the business is in its early stages and therefore not suitable for most investors.
Indeed, there’s no guarantee that yesterday’s cash call will be the last one and investors should prepare for more dilution as this small-cap builds out its operations.
The bottom line
So overall, even though Nanoco has made some progress over the past few months, the company has a long road ahead of it. There’s also the risk of further dilution from share placings.
Personally, I’d like to see positive cash generation from the business before buying, as well as more sales contracts.