Disinfection products supplier Tristel (LON: TSTL) has doubled its interim dividend on the back of strong sales growth and cash generation. This is before approvals for the Cache surface cleaning products start to contribute and North American royalties begin to ramp up. The share price is 8.89% higher at 490p.

In the six months to December 2023, revenues increased from £17.5m to £20.9m, while underlying pre-tax profit improved from £3.08m to £4.13m. Cash improved to £10.8m, even though there was a £3.74m outflow relating to the dividend.  

The latest interim dividend has doubled to 5.24p/share. The policy is to grow the dividend in line with earnings with a minimum annual increase of 5%. This will not hamper the ability of Tristel to fund its growth.

UK revenues grew fastest through a combination of an increasing number of medical procedures as the NHS tries to reduce the backlog and higher prices. Medical device decontamination revenues continue to grow outside of the UK.

North American sales of Tristel ULT for ultrasound disinfection have started, but they are still at low levels. There were also initial revenues in Canada for the ophthalmology product, but it still awaits approval in the US.

Cache surface cleaning product revenues were slightly lower. The TANK ClO2sporicidal disinfectant storage and distribution system has gained additional approvals, which will help to improve revenues in the fourth quarter and next year.

The strategy is to build up Cache revenues to a similar level to the medical device decontamination products, but they are currently less than 10% of the group total.

Cavendish forecasts a 2023-24 pre-tax profit of £7.6m, up from £6.2m. The total dividend is expected to improve from 10.5p/share to 11.6p/share. The prospective multiple is 36, which reflects the potential for royalty based growth in North America.

Although Tekcapital has gained 105% year to date, the shares are still undervalued compared to its portfolio company’s net assets. However, focusing on the current net asset value may be a little short-sighted.

Two broker notes released shortly after the MicroSalt IPO suggest the stock has at least 50% upside. And that was when recently listed portfolio company MicroSalt shares traded significantly lower than they are now.

Rating Tekcapital as a ‘buy’, broker SP Angel analysts said: “The IPO of Microsalt Plc on AIM this month provides further tangible evidence of the deep value in Tekcapital’s portfolio. Tekcapital is trading at a 50% discount to our fair value target of 20p. In our view, the stock trades at a double discount to its long term potential because the underlying prices that constitute the majority of our fair value target are themselves depressed.”

SP Angel has a 20p fair value target while Kemeny Capital sees 29.9p as fair value by applying an adjustment to NAV based on historical premium/discounts to NAV for technology investment companies and other listed entities that hold early-stage companies on their balance sheets.

There is some justification for the market attributing a discount to Tekcapital’s holding in MicroSalt because Tekcapital is locked in for 12 months before they can realise the value by selling shares. However, the market is effectively valuing the rest of the portfolio at less than zero.

At today’s share price of 91p, Tekcapital’s stake in MicroSalt is worth circa £30m. This compares to Tekcapital’s market cap of £23m.

Tekcapital’s holdings in Belluscura and Innovative Eyewear are worth at least £4m and are readily realisable. In addition, Guident has a Net Asset Value of £14m, according to SP Angel.

Guident, the last remaining privately held portfolio company in the Tekcapital portfolio, recently span out its Regenerative Shock Absorber into its own entity.

While Tekcapital hasn’t announced any specific fresh developments for the new company this year, they have previously alluded to the opportunity to recognise the value in the shock absorber technology separately from the teleoperations and for the new entity to satisfy its own funding requirements. This will likely increase Guident’s net asset value and is another important step in crystalising the value for Tekcapital shareholders.

Macro Environment

There are macroeconomic influences for investors to consider. The higher interest rate environment has weighed on the valuation of early-stage technology companies and this is evident in Tekcapital’s share price, as well as the value of underlying portfolio companies.

“Not only is Tekcapital trading at a 50% discount to this fair value figure, but the fair value calculation itself is mostly based on very depressed market prices,” SP Angel analysts said.

As rates start to fall, one would expect the value of Tekcapital’s portfolio companies to lose the valuation risk premium and return to historical averages. This by itself is supportive of Tekcapital shares at 13p.

Some may have preferred more progress in the portfolio companies to date but this doesn’t detract from the future potential the portfolio companies have to create Tekcapital shareholder value.

Tekcapital said they expect multi-million-pound revenue for each of the portfolio companies this year which will represent a step change in the valuation methods for the portfolio. Investors should expect Tekcapital to be valued on portfolio company revenues and profits in the coming years as opposed to the historical NAV.

Tekcapital is an investment company which has established technology companies with substantial competitive advantages and structural intellectual value, and their strategy is inherently long-term.

But this doesn’t mean Tekcapital’s listing on AIM can provide investors with opportunities in the short and medium term. As investors saw in the run-up to the MicroSalt IPO and the immediate reaction to the listing, Tekcapital shares can rerate very quickly on positive news. 

Venture capital strategy

Essentially, what Tekcapital does is provide investors with access to knowledge-intensive companies that may otherwise only be available to select private equity venture capital investors.

Venture capital investors are prepared to value and accept risk in early-stage ventures in the pursuit of returns many multiples of their original investment.

Successful venture capitalists only need one or two big winners to make a portfolio. The same can be said of Tekcapital. The two aforementioned price targets of 20p and 29.9p for Tekcapital are academic in that respect.

The lowly public valuations arguably do not reflect the long-term potential of Tekcapital. But, as we mentioned previously, being publicly listed provides the venue for investors to quickly revalue shares. Such an opportunity is only reserved for liquidity events in privately held companies.

Naturally, investing in early-stage companies is risky, but it will only take one company to produce outsized returns to create real Tekcapital shareholder value.

The UK Investor Magazine is thrilled Cornish Metals, NextEnergy Solar Fund, hVIVO, and 1Spatial will join us at the London Stock Exchange 13th March for our first in-person investor event of 2024.

Featuring four London-listed companies, this UK Investor Magazine Investor Conference will provide investors with deep insight into growth companies and their investment cases.

Register for the UK Investor Magazine Investor Conference 13th March

The focal point of the investor conference will be a series of investment presentations delivered by each company and a company Q&A session.

Investment presentations will be followed by a drinks reception and the opportunity to speak with business leaders and network with fellow investors.

Featured companies:

• hVIVO (LON:HVO)
• Cornish Metals (LON:CUSN)
• 1Spatial (LON:SPA)
• NextEnergy Solar Fund (LON:NESF)

Investors are able to join the event either by attending in person or by watching the virtual event.

UK Investor Magazine Premium Members and Qualified Investors are eligible for complimentary tickets. It is free to join the virtual event.

The event will be held at the London Stock Exchange in the heart of the City of London 13th March.

Register for the UK Investor Magazine Investor Conference 13th March

Featured Companies

hVIVO

hVIVO plc (ticker: HVO) (formerly Open Orphan plc) is a rapidly growing specialist contract research organisation (CRO) and the world leader in testing infectious and respiratory disease vaccines and therapeutics using human challenge clinical trials. The Group provides end-to-end early clinical development services to its large, established and growing repeat client base, which includes four of the top 10 largest global biopharma companies.

Cornish Metals

Cornish Metals is a dual-listed company (AIM / TSX-V: CUSN) focused on advancing the South Crofty high-grade, underground tin project towards a construction decision. South Crofty is a strategic tin asset in the UK and covers the former producing South Crofty tin mine in Cornwall which closed in 1998 following over 400 years of continuous production. South Crofty is fully permitted: underground permission till 2071, water discharge permission and planning permission to build a process plant in place. In 2017 Cornish Metals completed a Preliminary Economic Assessment that demonstrated the economic viability of re-opening the mine. In 2023 an updated MRE increased tonnes by 39% and contained tin by 32% in the Indicated category for the Lower Mine.

NextEnergy Solar Fund

NextEnergy Solar Fund (NESF) is a leading specialist solar energy and energy storage investment company that is listed on the premium segment of the London Stock Exchange and is a constituent of the FTSE 250. NextEnergy Solar Fund invests primarily in utility scale solar assets, alongside complementary ancillary technologies, like energy storage.

NextEnergy Solar Fund is driven by a mission to lead the transition to clean energy.

1Spatial

1Spatial plc is a global leader in providing Location Master Data Management (LMDM) software, solutions and business applications, primarily to the Government, Utilities, Transport and Built Environment sectors via the 1Spatial platform. Our solutions ensure data governance, facilitating the efficient, effective and sustainable operation of customers around the world. Our global clients include national mapping and land management agencies, utility companies, transportation organisations, government and defence departments.

The FTSE 100 was broadly flat on Friday as a busy week for company earnings drew to a close.

London’s leading index was down just 2 points at the time of writing as Standard Chartered topped the index with a 7% gain after beating Q4 profit estimates.

A bumper session for US stocks overnight helped the FTSE 100 start the session on the front foot before the rally diminished as the session progressed.

Better-than-expected results from chipmaker Nvidia helped propel US stocks higher as markets cheered the continuation of the AI boom, which has supported equities over the past year.

“Indices around the world are hitting record highs as the latest test for investor sentiment came and went in the form of Nvidia’s results,” said AJ Bell investment director Russ Mould.

“These managed to outmatch the market’s already elevated expectations, suggesting the AI theme is very real. However, how healthy it is for a single stock to have such a big bearing on global markets is questionable.”

Whether it is healthy or not appears to be of little consequence for investors in US stocks in the short term as the S&P 500 hit fresh record highs overnight.

With European and Japanese equity indices hitting record highs yesterday, the FTSE 100’s recent performance will disappoint UK equity investors.

The defensive nature of the index, which is also heavily weighted towards commodities, has prevented the FTSE 100 from retesting record highs and down is 2.8% over the past year compared to a 26.8% gain for the S&P 500. The Japanese Nikkei is 44% higher.

However, the FTSE 100 provides a greater dividend than overseas indices, and its composition may lead to outperformance in the future.

The FTSE 100 is heavily weighted towards China, and disappointing updates from miners and HSBC this week highlight the challenges the index has faced over the past year as China struggles to build momentum.

The eventual recovery in the Chinese economy could prove to be the catalyst for the FTSE 100 to close the gap between US and European stocks.

Interest rates

Financial markets struggle to focus on more than one thing at once, and with corporate updates front and centre this week, economics and monetary policy have taken a back speak.

Expect the focus to shift back to interest rates in the coming trading sessions as the corporate calendar slows and traders once more question when major central banks will first cut rates.

With data supporting the argument major economies can withstand higher interest rates, expectations of the first-rate cuts by the Federal Reserve and BoE are being pushed further and further out. This hasn’t impacted stocks thus far, but it doesn’t mean it won’t.

“Latest figures show that the US market remains tight, which further muddies the picture for the Federal Reserve. Those banking on swift rate cuts are likely going to be disappointed,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

Hornby shares soared on Friday after the Scalextric and Airfix owner announced Frasers Group had increased its stake in the company.

Frasers Group has acquired 1,107,575 Hornby shares to take their stake in the group to 8.9%.

Hornby shares have suffered in recent years as it struggles to attract younger generations to its collectibles offering. However, the challenges Hornby faces and the resultant performance of shares have made the company an opportunity too attractive for Frasers Group to overlook.

Hornby shares were 40% higher at the time of writing.

“Frasers has shunted its way up Hornby’s shareholder register, as it pounces on yet another retail name that’s been going through hard times,” said AJ Bell investment director Russ Mould.

“While Hornby’s shares have struggled for years, they’ve recently started to perk up and the appearance of Frasers on the shareholder register has given them another boost.”

Mould continued to explain that investors shouldn’t get ahead of themselves expecting a full takeover approach by Frasers Group.

“Don’t expect Frasers to launch a takeover bid for the group. Its style is to only acquire when something is on the verge of going bust as it prefers to pay pennies to buy something outright. Instead, Frasers is more likely to seek strategic conversations about helping Hornby to improve its distribution and logistics while at the same time realising it might be able to make a few quid by investing in its shares,” Mould said.

“At first glance, it’s not the most logical tie-up for Frasers which is best known for sporting equipment and athleisure. Train sets and tracksuits are about as far removed as you can get. Yet Frasers has shown willingness to explore different ways to get consumers to part with their cash. After all, it went from sporting equipment into sofas and computer games which is not a natural path to take.

“The real connection between Frasers and Hornby is the former’s GAME shops which have progressed from consoles and computer games to now also selling board games, trading cards and toys. Hornby’s products sit on GAME’s shelves and Frasers clearly spots an opportunity to do more.”