NetScientific: refinanced and focused on enhancing value

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The easiest way to describe NetScientific PLC (LON:NSCI) is a ‘reset story’. By this I mean new management has come in, cut costs, refinanced, refocused, and, hopefully, put the business back on the guide rails to success.

Like all reset stories, it will take the market a while to absorb what has occurred and appropriately value the business, which invests in technology and life sciences companies.

While that may be a short-term inconvenience for management, it might also provide an opportunity for eagle-eyed investors.

Shrewd stock pickers will already have spied a screaming anomaly.

One single investment, the firm’s holding in PDS Biotechnology, is currently worth £10mln, or 95% of NetScientific’s current market capitalisation. We’ll explore PDS in greater depth later on.

First, a short history lesson

It doesn’t serve much purpose raking over the chequered back-story of NetScientific other than for context. The group came to the market in 2013 backed by Neil Woodford.

Like almost all Woodford-endorsed enterprises of recent times, it had its problems (that’s perhaps understating its predicament given the scale of the share price collapse pre-2020).

The company’s new chief executive, Dr Ilian Iliev, will tell you one of those problems was the passive, inconsistent, high-cost investment and investment management approach used by his predecessors.

NetScientific’s other mistake, he believes, was using its own balance sheet to fund the development of its investee companies, with minimal third-party co-investment.

New team ushers in changes

Things began to change with the appointment as chairman of John Clarkson, a former PwC partner with plenty of turnaround experience as well as time spent working with growth companies.

Pivotal too was the recruitment of Iliev, a businessman, investor and strategist, initially as a non-executive director, and subsequently as CEO.

Financially the pair placed the company on firmer footing than it had been with a £2.3mln fundraiser that brought in a supportive new shareholder base.

Alongside the financial refresh was the all-share purchase of Iliev’s business, EMV Capital, a specialist venture capital group in the healthcare and sustainability space, which added another dimension to NetScientific.

Expanded portfolio

It increased the number of portfolio companies from nine to 17 businesses; it also brought in fee-earning transaction advisory expertise along with the ability to syndicate financings for investee businesses.

That latter point is both interesting and important. No longer is NetScientific using large chunks of its own cash to fund firms; instead, it is bringing in new investors.

A recent example of the strategy in action was the £3.4mln funding round for PointGrab, a technology firm in which NetScientific group has a 20% stake. EMV Capital advised on the syndicated financing, while NetScientific itself chipped in £60,000.

Iliev believes the new strategy of focusing on maximising returns based on each company’s individual profile, developing revenue streams and using third-party investment is already starting to work.

Certainly, the numbers bear this out. The loss for the year has more than halved and appears set to continue receding. 

The fair value, meanwhile, increased in 2020 by 80% to £21.2mln with further headroom for growth. The shares, trading at 12.5p at their nadir in early 2020, are 71p today. 

New blueprint

The model ushered in by Iliev and Clarkson is one that means NetScientific can be more useful to investee companies.

It now has the ability to meet capital requirements that can take businesses from the seed rounds to a liquidity event.

“We can also add value through access to networks across the Atlantic and corporate links,” says Iliev.

The team has also been able to offer direct, tangible advice including an intervention that helped one company save money, staving off the requirement to raise further funds.

It isn’t purely altruistic. This active management enhances value. Let’s look at Nasdaq-listed PDS Biotechnology, where NetScientific acted as anchor investor for two share placements totalling US$32mln, at $1.30 and $2.37 respectively.

It is worth pointing out PDS is now trading at more than US$11 a share, which represents a significant return within a one-year period.

But have the executives of investee firms been receptive to this more hands-on approach?

“By and large they welcomed us. They said, ‘Great. Finally, we meet you guys. The last time we saw somebody was x-number of years ago’,” says Iliev. 

Significant upside?

Going forward, the plan is to stick with the capital-light model that has been developed with “judicious syndicated investments”.

The mix might also include soft funding such as grants and corporate joint development agreements to produce enhanced returns.

Relationships and opportunities will also be exploited in the US, UK and internationally – something the company calls its transatlantic bridge.

The 53% rise in the share price in the year to date reveals investors are starting to understand the story.

However, the broker WH Ireland reckons NetScientific has significantly further to go. It calculates the shares are worth 135p each – a 90% premium to the current price.

Revenues from ProAxis and Glycotest, along with advisory fee income from EMV Capital could see the business break-even in 2023, WHI said. Any investment realisations would come on top of that.

In a note to clients, it added: “Notwithstanding the need to manage near-term cash flow requirements, across an increasingly diversified portfolio, a number of catalysts exist that could yield significant upside potential for the shares.”

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