Tekcapital FY21 Results Preview

The Investment Case

The UK-listed investment firm, Tekcapital, creates value from investing in new and novel university-developed Intellectual Property (“IP”) to develop products that address $bn market opportunities.

The business’ ethos is built upon the belief that coupling university IP with experienced senior management teams can deliver a positive improvement in people’s lives along with significant growth in net asset values and returns on invested capital for its shareholders. When it can realise an exit, its goal is to distribute a significant proportion of the sale proceeds as a special dividend.

To date, Tekcapital has returned more than four years of consecutive portfolio and Net Asset Value (“NAV”) growth and it recently reported record results for the six-month period to 31 May 2021.

During the 12-month period to 1 December 2021, Tekcapital’s share price has more than doubled, reaching highs of 38p in November 2021. However, recent weakness in the price presents an interesting entry point for all shareholders, despite the unpredictable macroeconomic backdrop.

Stock Chart | TEK

Ahead of Tekcapital’s results for the year to 1 December 2021 which are forecast for April 2022, we have highlighted what investors should lookout for and why they should be prepared for several significant portfolio milestones and potentially, another set of record-breaking results.

Portfolio Holdings

In our opinion, the four key portfolio companies for Tek comprise of:

• Salarius – 97.2% Holding; Food Tech; New low-Sodium salt 
• Lucyd – 80% Holding of subsidiary Innovative Eyewear; Smart Eyewear  
• Guidant – 100% Holding; Autonomous Vehicle remote monitoring software & regenerative shock absorbers 
• Belluscura – 15% Holding; Portable O2 concentrators and other respiratory devices 

Salarius

TEK has a 97.2% holding in Salarius, which owns a patented process for producing micro-particle salt crystals -"MicroSalt®" - which can reduce sodium content in snack foods by up to 50% whilst delivering the same level of salty flavour.

Sitting at the heart of the low sodium ingredient market, its goal is to make snack foods healthier.

The $2bn Market Opportunity:

Created to deliver half the sodium of regular table salt, MicroSalt®’s distinguishing feature is its small salt particles - about one hundred times smaller than typical table salt - that use a large surface area-to-volume ratio to generate a salty taste while using significantly less salt.

The fact that MicroSalt®’s particles (non-GMO and Kosher) are around 100 times smaller than table salt, allows them to rapidly dissolve, producing a large sensation of saltiness.

The focus of the snack food industry to provide products that ‘taste good’ but that also reduce a consumer’s sodium consumption is aimed at reducing the levels of excess sodium consumption which contributes to cardiovascular disease, a leading cause of premature death globally.

Cardiovascular disease, which is considered the world’s leading health problem causing 17.6 million deaths annually, is closely related to high sodium consumption, especially in snack foods.

According to the US FDA, reducing daily sodium intake from 3,400 mg to 2,300 mg / day will reduce approximately 28,000 – 50,000 premature deaths per year in the United States.

To address this problem, Salarius has developed the world’s smallest salt crystals with MicroSalt® ‘so that companies can make full flavour snacks ‘with the same saltiness, but less sodium’.

Decreasing the public’s sodium intake would aid the ongoing efforts to curtail heart disease, which according to the British Heart Foundation, causes more than a quarter, 27%, of all deaths in the UK alone - that’s more than 160,000 deaths each year – or one death every three minutes.

According to data acquired by Microsalt, globally, the low sodium market is estimated to reach US$1.76 billion by 2025. According to a recent report published by Coherent Market Insights; the global sodium reduction ingredient market is projected to reach around $2,158.7m by the end of 2027 - growing at a CAGR of 12.2% between 2020 and 2027.

The Positive Regulatory Drivers:

In October 2021, the U.S. FDA released a series of voluntary sodium reduction goals for the food industry in what was described at the time as “a major milestone” for the United States.

These new sets of voluntary sodium reduction goals for the food industry are expected to “provide measurable voluntary short-term (2.5-year) goals for sodium content in commercially processed, packaged, and prepared foods to reduce excess population sodium intake.”

Dr. Jennifer Ashton, Chief Medical Correspondent of ABC News, who believes the guidelines can encourage more snack food manufacturers to reduce the sodium levels in their products, said this news “could be the biggest, most important intervention in a generation for public health.”

Meanwhile, Salarius also expects the sodium reduction goals to have a positive impact on both the business-to-business (B2B) sales of MicroSalt® as well as the retail sales of its SaltMe! crisps.

Microsalt expects SaltMe! to become ‘a national brand’ in the low-sodium-full flavour snack category; it said its e-commerce sales should be ‘positively impacted,’ given the correlation between retail distribution, brand awareness, and expected increase in ecommerce sales.

To date and following the successful launch of the SaltMe!® snack line on Amazon in December 2020, the SaltMe! crisps range has been rolled out across some of the largest supermarket chains in North America and into the Mexican market via its Mexican distribution partner. The Company recently announced that its crisps are currently in more than 1,400 stores in North America. In fact, in the first two months of 2022, Salarius’ 2022 sales had already exceeded total 2021 sales.

Salarius in 2022

In February 2022, Salarius executed its first bulk MicroSalt® order through FXM, its Mexican based distribution partner in Mexico. The company believes the roll-out is a testament to the timeliness of its products, as well as its ability to customize its production for the Mexican market.

Whilst Salarius stated that it was ‘too early’ to place a firm number of estimated revenues for its chips in 2022, the company believes that it may see significant sales growth in the current year.

“The health issues surrounding the excess consumption of sodium cannot be overstated and the ever-increasing profile of low salt and sodium products serves not only as a launching pad for MicroSalt but acts as a foundational tool in our fight to improve the health and wellness of our family, friends, neighbours and the world," said Rick Guiney, MicroSalt's CEO.

The US FDA sodium reduction guidelines and the placement of the SaltMe! crisps with Kroger, the largest supermarket in the U.S, along with the receipt of two international awards all point to the same conclusion: the immediate and global need and market for MicroSalt, Guiney told investors.

Fair Value of Salarius

As of 31 May 2021 (1H21), Salarius reported a fair value of US$3.6m, an around 50% increase in the company’s fair value reported in May 2020. Over the five six-month periods to 31 May 2021, the fair value of Salarius has seen a CARGR of circa 13%.

Lucyd

Lucyd is wholly owned by the investment firm and is positioned at the intersection of the online wearables, eyewear, hearables and digital assistant markets. Lucyd sells its innovative Bluetooth enabled glasses through its US Subsidiary Innovative Eyewear, Inc, of which Tekcapital owns 80%.

Key to its IP portfolio are the Lucyd® Lyte® glasses, a range of prescription eyewear and sun glasses which enables wearers to ‘seamlessly play music, take phone calls and chat with their phone’s assistant while maintaining situational awareness with open-ear technology.’

The eyewear product, which has received more than 600 5-star ratings to date on Lucyd.co and Amazon, is available in more than 200 retail optical and sporting goods stores in North America.

Tekcapital said it believes the Lucyd® Lyte™ line has the potential for further mass market adoption due to its “advanced design, designer eyeglass form-factor and affordable pricing.’ The glasses are positioned ‘at the intersection of the eyeglass, wearables, hearables and voice assistant markets.

The company said its widescale roll-out is expected to expand the range’s presence across the US and North America and Harrison Gross, Chief Executive and Co-Founder of Innovative Eyewear, said the influence of these large retailers in their respective markets “cannot be overstated.”

The $28bn Market Opportunity:

The U.S. online eyewear market is forecast to reach around $28.2 billion in 2021. Furthermore, according to Allied Market Research, over four billion voice assistant devices are currently in use globally with projected sales of $5.9bn by 2026 with a CAGR of 30.5%, with the hearables market segment projected to reach $5.1bn in the US by the end of 2026 with a CAGR of 17.2%.

According to Fortune Business Insights, the overall wearables market is projected to reach $179 billion by the end of 2026 with a CAGR of 5.7%.

Lucyd in 2022:

At the end of 2021, the Lucyd Lyte® range was approved by DICK’s Sporting Goods® one of the largest sporting goods retailers in the US, and Best Buy, one of the largest electronics retailers.

DICK’s Sporting Goods® and Best Buy are now providing a platform for the sales of the Lyte® range via its ecommerce channels. A corporate timeline for Innovative Eyewear is described below.

Lucyd has significant plans for 2022. In February 2022, Lucyd’s Innovative Eyewear subsidiary was officially approved by two big US-based retailers to expand the presence of Lucyd Lyte® on their ecommerce sites. Innovative Eyewear said it plans to introduce several new products in 2022.

Commenting on the US and North American expansion, Harrison Gross, Chief Executive and Co-Founder of Innovative Eyewear, said “We are thrilled to launch our Lucyd Lyte products on Dicks.com and BestBuy.ca. We believe Lucyd Lyte eyewear is perfect for active lifestyles since it allows you to enjoy music and calls handsfree without obstructing your hearing.” Gross added the influence of both retailers in their respective markets “cannot be overstated.”

In 4Q22, Lucyd intends to launch upgrades to its Vyrb™ social media app. With this new app, the brand will introduce a complete hardware-software wearable system, thereby allowing users to enjoy dynamic, audio-focused social experiences on Lyte®.

Fair Value of Lucyd

The total fair value of Lucyd increased by US$5.2m from 30 November 2020 to 31 May 2021 to $7.91m. Over the six-month period to 31 May 2021, the fair Value of Lucyd has seen a CAGR of circa 13%.

Projections were updated compared to the 30 November 2020 valuation considering agreements executed as of 31 May 2021, as well as previously unfactored advancement of the US sales pipeline including: progression of discussions with multiple national US optical chains; independent optical stores; sporting goods stores; and big box retail stores during the period.

Guident

Guident, which is wholly owned by Tekcapital, is focused on developing software apps that allow the operators of Autonomous Vehicles (“AV”) to remotely monitor and control their vehicles.

With the demand for the last mile AV delivery autonomous vehicle market rising, Guident predicts an accelerated roll-out of land-based delivery drones for food and medicines; it believes these drones will need remote monitoring to address the unavoidable mishaps that will likely occur.

However, multiple surveys have shown that consumers have concerns about the safety of AV vehicles. One comprehensive review revealed that people have high levels of concerns regarding the safety of AVs; one study declares that only 6.9% of consumers had no concerns with AVs.

As a result of these conclusions, the group suspects that monitoring and remote controls for AVs is likely to become an increasing legal requirement for AV operation in the US and other territories.

The $42bn Market Opportunity:

According to Triton Market Research “the last mile autonomous vehicle delivery market is expected to reach $41.7 billion in total value by 2028” with a CAGR of 19% as contactless or “touch-free” delivery accelerates post the COVID 19 pandemic.

Despite the size of the predicted market, there is still no existing technology that enables vehicle manufacturers to achieve full autonomy; in fact, a lot of these vehicles will encounter safety issues, meaning that human assistance will always be needed in some way.

Positive Regulatory Drivers:

One catalyst of this market is the pending legal framework in the US; in fact, Florida has already passed a law making human remote monitoring for AVs obligatory when a driver is not present.

Guident said it believes this legislation forms “a critical path” that will enable the commercial introduction of AVs in Florida; as a result, it is likely to be required in other jurisdictions.

Guident’s initial goal, therefore, is to develop and operate the first Remote Monitoring and Control Centre for ground-based delivery drones and AVs in Florida where this law applies.

Guident in 2022: 

In February 2022, Guident filed its 8th patent application covering improvements to their remote monitoring and control centre for AVs.

This falls under the U.S. patent application #17/579,203 and is entitled: “Near Real-Time Data and Video Streaming System for a Vehicle, Robot or Drone”. Guident said it believes its technology is “one of the lowest glass-to-glass (camera-to-monitor) latencies in the market.”

Explaining to investors, Harald Braun, Chairman & CEO of Guident Ltd. said: “This technology is required by teleoperations (which enables a human to remotely monitor and control an autonomous vehicle) as it facilitates rapid image analysis for quick decision making.”

Additionally, Guident continues to progress with its regenerative shock absorbers (RSA), with its RSA prototypes having been fabricated (see image below). The RSAs are being evaluated by independent test facilities to confirm their performance and capabilities. Guident said it is now in discussions with potential customers and strategic partners to both manufacture and use their RSA’s. It believes that if their new RSA can generate 100 Watts at 60MPH on a class A road, it is likely to be included in many electric vehicles in the future. As the world continues to move to reduce its carbon footprint, the project number of electric vehicles is expected to reach 144m in the next eight years. Time and testing will tell.

Guident Fair Value

As of 31 May 2021, the total fair value for Guident remained unchanged from 30 November 2020 at $22.05m. As of 31 May 2020, its net asset value stood at $15.511m. Over the five six-month periods to 31 May 2021, the fair Value of Guident has seen a CAGR of circa 21%.

Belluscura

Tekcapital holds a 15% carrying interest in the issued share capital of Belluscura (BELL). BELL is a developer of portable oxygen concentrators, providing on-the-go supplemental oxygen.

The $5.64bn Market Opportunity:

As a result of the global prevalence of Chronic Obstructive Pulmonary Disease (“COPD”), the medical portable oxygen market is strong and is now forecast to grow from $3.14bn in 2021 to $5.64bn by 2027, representing a CAGR of 10.17%.

Belluscura in 2022:

Having successfully launched its first X-PLOR product into the supplemental oxygen market, Belluscura is now focused on developing follow-on products which will be launched in 2022. 

The company recently told investors that the development of its next generation follow-on products - the X-PLOR CX and X-PLOR DX - continues to progress well. The expected launch of these products is planned to occur during the second and third quarters of 2022, respectively.

Robert Rauker, CEO of Belluscura, which as of 31 December 2021 had $15.6m in net cash, said the group has a strong balance sheet and it is therefore well positioned to deliver substantial growth. The Company also commented that their 2022 sales have already exceeded total 2021 sales.

Fair Value

Belluscura commenced trading on London's junior AIM Market back in May 2021. At the time of the IPO, the stock’s price was at 45 pence per Belluscura share, valuing Tekcapital's holding at around $10.8m, compared to the book value of US$2m as of 30 November 2020. 

2022: Tekcapital’s Valuation Drivers

1H21 results to May 2021

Despite significant headwinds due to COVID-19, the first half of 2021 to 31 May 2021 saw a 56% increase in the Net Asset Value “NAV” of Tekcapital to US$51.1m, delivering revenue of $14.5m (1H20; $2.9m) and Profit Before Tax of US$13.0m (1H20: US$1.9m).

Whilst all TEKs investments, described under IFRS as equity instruments, increased over the 12-month period from 31 May 2020 to 31 May 2021, Lucyd and Belluscura delivered the most significant Fair Value growth during the six-month period from 1 December 2020 to 31 May 2021.

As at 31 May 2021, Guident represented approximately 48% of the total fait value of the portfolio with Belluscura, Lucyd and Salarius representing 28%, 17% and 8% respectively.

1H21 Portfolio Fair Value

[Source: Company Filings]

This result presents investors with an enviable track record of several half years of consecutive portfolio fair value growth with a strong balance sheet following a placing to raise US$5.3m in March 2021.

Portfolio Fair Value Progression

[Source: Company Filings] 

FY21 milestones to watch:

“Our key portfolio companies are progressing well and should reach significant additional milestones by the end of 2021”, said Chairman, Dr. Clifford Gross said at the time of 1H21 results and added Tekcapital was “bullish” about its prospects for the remainder of the year

This sets the scene for what we believe could be significant progress during 2H21 across the portfolio:

• Sales of Salarius’ SaltMe!® Chips have seen a 40-fold increase since January 2020, with 2022 sales exceed total 2021 sales. 
• Lucyd continues to expand its presence across North American markets 
• Guident is now in discussions with potential customers and strategic partners for its RSA's; and 
• Autonomous vehicles are forecast to have a positive impact on the portfolio in 2022. 
• Belluscura has seen its shares appreciate strongly since IPO, and their sales in 2022 already surpassed 2021 total

It therefore appears the portfolio is already starting to deliver for shareholders as we look at a leading data point from the mark to market of Tekcapital’s holding in Belluscura (BELL).

The Data Point to Future Fair Value

Belluscura IPO’d on 11 May 2021 and was recorded in TEKs 1H21 accounts as of 28 May 2021 at 45p per share.

Stock Chart | BELL

Since 28 May 2021, the share price of BELL has soared to 98.5p as of 30 November, being the last trading day prior to the expected FY21 Balance Sheet date of TEK. At 45p, the Book Value for TEKs holding in BELL was US$10.8m, whereas at 98.5p this would be equivalent to over US$23m, assuming no divestments occurred during 2H21

Therefore, even if we assume none other portfolio companies have appreciated in value during 2H21, which we argue is unlikely given the progress made during the period, this will result in an increase in the overall Portfolio Fair Value for TEK of over 20% to US$63.3m during the six months to 1 December 2021.

Beyond FY21

Beyond the FY21 results, several further valuation inflexion points are expected during 2022 with TEK already indicating to investors “We believe that we are executing on our strategy, and this should result in increases in returns on invested capital as our portfolio companies continue to mature towards meaningful exits, which we hope to see in the next 24 months.”  

Referring to Innovative Eyewear, Lucyd’s subsidiary, filing for a potential IPO; the roll-out of MicroSalt’s SaltMe! Crisps in the largest supermarket in the United States; as well as Guident’s demonstration of their remote monitoring and control centre technology.

Tekcapital’s results for the year to 1 December 2021 are expected in April 2022. Investors should lookout for significant portfolio milestones as well as another record fair value for its portfolio.

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