Is Nanoco Group plc a falling knife to catch after dropping 40% this year?

Nanoco Group plc (LON: NANO) has crashed this year but are the shares attractive after recent declines?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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. 

Six months on and it looks as if Nanoco’s outlook has improved significantly, although the company still has plenty of work to do.

Moving forward 

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. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »

Black father and two young daughters dancing at home
Investing Articles

A £3K investment buys me 632 shares in 2 stocks for a second income!

This Fool explains how a second income is possible through dividend-paying stocks and details two picks that could help her.

Read more »