Snippets from Jefferies note27 Oct 2018 01:03
Quantum Dots (QDs) offer cost-efficient bright colours for (TV) displays & effective sensors. We expect mass-market TV adoption led by Samsung, as current premium usage spreads to lower price points. Nanoco’s new electronics customer (likely Apple) is funding capacity expansion, adding validation, cash & diversification. New COO/CFO is a +ve. The long road to commercialisation is reaching key inflection points, albeit still high risk – initiate at Buy, 65p PT.
TVs – from premium to mass market: Samsung (TV #1) has targeted the comparatively cheap QD technology alongside market #2 LG’s expensive OLED sets. Smart for Samsung, but painful for QD pioneers Nanoco and private Nanosys, with volumes restricted to part of the c.20m premium/largest sets. Chinese and other OEMs, high-end gaming monitors and the trickle down of premium features to mass markets (10x larger) offer significant volume gains, and reports of a <$900 QDTV from Samsung next year would breach the dam on demand. Next gen QDs should slot in at the top end, with OLED levels of brightness at lower cost.
Sensors bring cash, validation and diversification: There are applications of QDs in healthcare/imaging, lighting and solar, but these are not large/easily valued yet. In February 2018 a ‘large, listed US corp’ entered into a supply agreement for an electronics product, with milestone-based advance payments (£2.6m to date) funding capex at the Runcorn plant. The likelihood (supported by our Taiwanese and Korean research affiliates) that this is Apple for 3D sensing would provide a genuine strong second application, diversifying display dependence, providing cash & validation.
New COO/CFO positive: Fresh from a significant turnaround and value creation at NCC, Brian Tenner's arrival and maiden results reassure on accounting, and his willingness to choose Nanoco should be well received by a wide investor following.
Fear to greed isn’t a straight line: Nanoco trod the line between investors’ fears it would run out of cash before commercialising vs. potential large markets/high margins. Although FY19 is unlikely to show much progress, we have confidence that when the large markets open, Nanoco will capture a significant share (due to IP, licensees, scalability of production). Volatility is likely, and we believe significant potential upside is needed to justify a Buy. Risks are delays in TV & sensors plus competition, while cashflow stays negative to FY20E. Our 65p PT is based on a SotP of the different applications, discounted additionally at 30% for risk/time, and implies a 15x FY21 P/E."
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