A tech bargain that’s primed to recover

Tekcapital (TEK:16p), an Aim-traded investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices, has seen its share price come under pressure since late summer. In fact, the shares are the laggard in my market-beating 2022 Bargain Shares Portfolio, clipping five percentage points off the portfolio’s performance.

Seeing the pactual

Last year’s technology rout hasn’t helped. The group holds 5.19mn shares in Innovative Eyewear (NASDAQ:LUCY), the US operating subsidiary of Lucyd, the first company to deliver prescription glasses with Bluetooth technology. Innovative raised $7.3mn when it listed its shares, at $7.50 (£6.17), on Nasdaq last summer. The current stock price is $1.20, valuing Tekcapital’s stake at $6.2mn (3.4pa share), or 77 per cent less than the $27mn (15p) valuation in its 2022 interim accounts. Not that Innovative has not been making progress. The company’s latest deal is with Authentic Brands Group (ABG) to license its iconic outdoor brand Eddie Bauer for smart eyewear, having previously agreed a license with Innovative to market Lucyd eyewear for ABG’s Nautica brand.

In addition, Lucyd products are being carried on the website of Dick’s Sporting Goods, the largest sporting goods retailer in the US, and on Academy Sports + Outdoor’s main site, the second-largest sporting goods retailer. Lucyd has also partnered with Everest.com, a new sporting goods marketplace, to offer Lucyd Lyte glasses to their rapidly growing customer base.

Moreover, Innovative has completed initial production of its second-generation product, Lucyd Lyte 2.0. Offering users new features including a four-speaker array for immersive audio, the longest playback time of any smart eyewear device, and a market-leading battery life, product launch is planned in the first quarter this year.

Distribution agreements support Belluscura’s sales forecasts

The other reason for Tek’s share price weakness is the disappointing share price performance of Aim-traded respiratory medical device company Belluscura (BELL: 40p). Tek holds a 14 per cent stake in the company that was valued at $18.9mn (10p a share) in its interim accounts, but it is now only worth $8.3mn (4.5p).

I note that Belluscura has recently entered into its first international distribution agreement outside of the US, with MedHealth Supplies of South Africa. MedHealth has placed orders for 2022 and 2023, with deliveries starting immediately. Last year, Belluscura also signed a raft of distribution agreements in North America, including no fewer than 17 in the final three months of 2022 on the back of a collaboration agreement with VGM Group.

The company exited the year at an annualized production run rate of 6,500 units and Dowgate Capital predicts 12,000 unit sales in 2023, although this is less than previously forecast, prompting the broker to push back its timeline for Belluscura turning cash flow positive to the first half of 2024. That said, assuming management can ramp up sales to 30,000 units in 2024 then a current year forecast cash loss of $4.9mn could become a profit of $5.4mn (£4.4mn) next year, a healthy sum for a £48mn market capitalization company. Cash, inventory and inventory deposits total $11.9mn, and the directors expect to secure invoice discounting facilities shortly to fund the ramp up in sales.

Addressing and whitejor health issue

I also note that Zeus Capital has been appointed nominated adviser and broker to Microsalt, a portfolio company that has developed and makes a proprietary low-sodium salt, ahead of its London initial public offering (IPO) this year. MicroSalt provides a much-needed option that allows food manufacturers and consumers to slash the sodium content of their food without impacting the flavor. Almost a third of adults worldwide suffer from high blood pressure and other cardiovascular diseases.

Last summer, Microsalt received an equity investment of $0.4mn from a Spanish venture fund Tech Transfer Agrifood at a post-money valuation of $9.27mn, valuing Tekcapital’s stake at almost $7mn (3.8pa share). Expect material capital upside to Tek’s shareholding if the IPO attracts sufficient investor interest, as seems likely given the end market Microsalt is addressing and the traction the company has gained in North America. Hannaford Supermarkets, an operator of 185 stores in Maine, New York, Massachusetts, New Hampshire, and Vermont, is the latest retailer to stock its products.

Discount too deep to sum-of-the-parts valuations

So, with Tek’s market capitalization of £24mn (16p a share) 36 per cent below my spot net asset value estimate of $45.5mn (£38.5mn, or 24.9pa share) after factoring in the hit Tek suffered on its holdings in Innovative and Belluscura in the second half of 2022, I feel that the de-rating has gone too far.

A successful IPO of Microsalt, likely positive newsflow from portfolio company Guident, a developer of remote monitoring and control software that improves the safety of autonomous vehicles and delivery robots, and increasing sales traction from Innovative should act as share price catalysts for a rerating in the first half of 2022. The share price is also primed for a technical bounce, priced at the bottom of the 15.6p to 20.5p range (closing prices) it has traded in since mid-October 2022. Recovery buy.

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