A rally in low-sodium food technology company MicroSalt this week has served as a reminder of the deep value in Tekcapital, the AIM-listed investment company that founded, grew, and listed MicroSalt in London earlier this year.
MicroSalt shares have gained around 20% over the past week and is currently valued in the region of £35m. Tekcapital’s 77% stake in MicroSalt is worth circa £26m – far more than Tekcapital’s current £15m market cap.
Given Tekcapital has three other portfolio companies valued at around £20m – based on current share prices and the latest NAV calculations by Tekcapital – shares in the technology investment company are substantially undervalued.
MicroSalt is Tekcapital largest, and, importantly, most liquid holding. Investors will be watching closely for any developments in portfolio company Guident’s valuation but this remains a private company and there are no immediate plans to realise value in the autonomous vehicle safety specialist.
There is the matter of Tekcapital’s 12 month lock-in period in MicroSalt shares. There is risk premium attached to the uncertainty of where MicroSalt shares will be next February and this is probably the only reason Tekcapital shares aren’t trading two or three times higher than where it is today.
Tekcapital isn’t able to sell any MicroSalt shares yet due to a 12-month lockup after the IPO. There is no suggestion they will rush to sell as the date passes in February 2024, but as the time draws closer, Tekcapital shares will become increasingly attractive as the lock-in period risk premium dimishes.
It’s simple maths supporting a simple arbitrage opportunity. Should MicroSalt shares hypothetically remain at the same value until February next year, investors could buy Tekcapital shares and gain exposure to a listed stock in MicroSalt at a substantial discount.
Tekcapital has a strategy to pay investors special dividends from investments when they are sold. With such a strong performance following its IPO, MicroSalt may well be the first company that enables Tekcapital to do this.
There is a risk that MicroSalt shares fall. But even if the MicroSalt share price halved, Tekcapital’s stake would be worth not too far off TEK’s current market cap. There are three other portfolio companies to consider as well.
Like many other UK small and midcaps, Tekcapital is the victim of chronic market-wide undervaluation due to macroeconomics. Higher interest rates are holding back cash that would otherwise find its way into exciting UK technology growth companies such as Tekcapital. This, however, could all be about to change if the Bank of England’s comments this week are anything to go by.
In addition to MicroSalt and the macro enviroment, there’s Guident to consider. The autonomous vehicle safety company is a pioneer in safety solutions, which now span autonomous shuttles, surveillance robots, and buses. The applications and commercial opportunities are growing month by month.
Demonstrating the calibre of Guident’s partners, Auve Tech, the developer of the MiCa autonomous shuttle, has exported a fleet of autonomous shuttles to Softbank company Boldy in Japan. Guident is helping Auve Tech launch into the US market.
Guident has also received a grant from Space Florida to develop low-orbit satellite technology. The company is breaking new ground and laying the foundations for substantial revenue growth in the years to come.
Guident by itself is likely worth more than Tekcapital’s current market.
It is likely only a matter of time until the market wakes up to the potential locked away in Tekcapital shares.