The hottest biotech Avacta, the gold frenzy of Greatland, and the tech superiority of Tekcapital. Consider the catalysts for all three.
The joy of the FTSE AIM market is that unlike the FTSE 100 — where the common advice is to buy an index tracking ETF and enjoy the dividends — you need to pick individual small cap stocks to return a profit. For context, the AIM market has now nearly halved since mid-2021 and at 675 points is coming close to the pandemic mini crash low of March 2020.
But where there’s weak sentiment, there is almost always also serious opportunity. While this piece is not advice (and with the caveat that all small cap investing is riskier than blue chips to a degree), the following three AIM shares appear to boast strong fundamentals but have been depressed by weak market sentiment.
Let’s dive in.
Tekcapital (LON: TEK)
Tekcapital shares continue to fall into deep value territory, but this conviction play has several arrows in its quiver. Its university spin-off portfolio companies are driving significant strategic growth in sectors including electric vehicles, food technology, healthcare, and smart glasses.
Possibly the most promising portfolio company is MicroSalt — in which TEK has a 87% shareholding. The company has developed a novel type of salt which contains 50% lower sodium than in typical table salt, and therefore has huge health and food tech implications.
While the company’s long-awaited IPO launch has been delayed — a shrewd move given the state of the markets — the company’s closest comparator is OptiBiotix, which has developed a similarly advanced sugar substitute. Shares in this company quadrupled overnight in July, and MicroSalt could IPO at a high valuation if it continues to win commercial contracts.
Tekcapital also owns 11% of AIM-listed Belluscura, 100% of Guident and 40% of NASDAQ-listed Innovative Eyewear. Belluscura’s continued contract wins are positioning the portable oxygen unit developer for significant long-term growth, while Guident’s technology within both the EV and autonomous driving space will likely yield concrete results soon.
For context, CEO Harald Braun has hinted that the company is testing with a leading tyre manufacturer and is also in deep conversation with various EV manufacturers. Finally, there’s Innovative Eyewear, which has signed brand deals with the likes of Reebok, Nautica and Eddie Bauer — and smart products covered by these licensing agreements are set to hit the markets shortly.
Given the growing popularity but restrictive price tag of competitors such as those on offer at Meta Platforms, there is a decent chance of growth here too.
Overall, CEO Dr Clifford Gross considers that the entire portfolio is hugely undervalued — arguing in the recent UK Investor Magazine Virtual Investor Conference that each company will eventually generate multiple millions in revenue.
And at the current share price, TEK looks excellent value.
Avacta (LON: AVCT)
Avacta enjoys, by some margin, the most dedicated retail investor base on AIM. There are some good reasons for this — its flagship clinical trial candidate AVA6000 is delivering some frankly astounding results for a phase 1 trial — and a company attempting to deliver chemotherapy without side effects will deservedly enjoy investor devotion.
November will almost certainly see Avacta release the hard numbers for Phase 1A — and it’s this data which could start to see research platforms increase the likelihood of success from the standard 10% to a more realistic 40%+.
Investors questioning why this data isn’t published yet should understand that from a trust perspective, the company gets one shot at a first impression: any mistakes, no matter how small, would require a rectification. This would be a disaster from a PR perspective, when you have a company attempting to convince the wider investing public that it can deliver such an extraordinary medical advancement.
Fortunately, it seems that CEO Alastair Smith understands the need to be careful when starting to engage with the mainstream media. The other facet to consider is financial; while Avacta has multiple funding options open, including non-dilutive, the company will need access to significant cash to deliver the next clinical trial phase.
It seems inevitable that a tie-up between Avacta and a pharma major is coming down the tracks — if nothing else, the company simply does not have the financial firepower to engage in logistics such as mass manufacture and transport of its treatments.
I suspect that the favoured partner will be Novartis — apart from its large cash position and appetite for merger activity, its head of innovation of Global Drug Development, Janet Munro, recently issued a ‘personal view’ on LinkedIn concurring with Smith that AVA6000 may very well be a ‘paradigm shift.’
Of course — and I’ve made this point before — Avacta is still in the early days. No biotech, no matter how promising, is a sure thing. But the risk-reward ratio remains very attractive, even If you could have picked up shares for less than £1 a few short months ago.
Greatland Gold (LON: GGP)
Greatland Gold shares appear to be recovering some positive sentiment after months in the doldrums. It’s hard to see why the share price has fallen so hard from a fundamental perspective — but it’s key to understand that the market is driven by sentiment.
GGP has been hit by two barrels; the collapse of Horizonte Minerals’ share price may have felt analogous as both companies have exceptional deposits, and GGP has also continued to delay both the publication of the long-awaited Mineral Resource Estimate upgrade, as well as the Definitive Feasibility Study, which is now being delayed yet again to Q3 2024.
Now the tide may be turning. Shares in the explorer closed at 8p last week, and backer Wyloo (controlled by Fortescue Executive Chairman Andrew Forrest) recently injected another AU$50 million into Greatland to get that DFS into print next year.
On a wider scale, Newmont’s acquisition of Newcrest has thrown up a question mark over whether the now largest gold miner in the world might now want to dispose of Telfer/Havieron as part its multi-billion-dollar disposals plan.
Analysts disagree on what the plan might be: Newmont has made clear it only wants to keep Tier 1 mines on the books, and as a general rule, these are mines which can deliver more than 500,000oz of annual gold production.
It’s estimated that Havieron will only deliver 300,000oz per annum — but the companies do not yet have the updated MRE or the DFS — and it’s also worth noting that retaining the assets pushes back the necessary shut down costs for Telfer, and that they are in arguably the best mining district in the world.
Regardless, Greatland is now more than 80,000m deep into further drilling since the last MRE update, and if you consider that the maiden resource estimate was 4.2 Moz AuEq in December 2020, and then 4.4 Moz in October 2021 at the PFS Resource estimate, and then 6.5Moz by March 2022, investors are likely salivating at the prospects of another massive increase.
There’s about a thousand different ways this AIM stock could deliver. But my suspicion is that the MRE update is going to blow all previous estimates out of the water. Of course, continual delays may be starting to wear thin on investors — but this is exploratory mining, not Legal & General.