Newcomers to the market may not be everyone’s thing and unless you undertake some prior research and meaningful investigation, any subsequent investment can largely amount to a large leap of faith.
That said, getting in early or close to the ground can often bring some decent rewards, as has been the case for me recently with Calnex, Fonix and CMO.
My latest entry on this front comes with AIM debutant Light Science Technologies (LST) which has come to the market at 10p per share and which saw my buying in on the opening day.
Raising proceeds of £5.2m the valuation at the current price is just over £17m, which I am hoping will prove decent value moving forward, if the story here pans out as I hope and others envisage.
The company actually consists of two arms, one which has been established for a near 25 years, the other, an early stage, yet exciting prospect that has been spun out of the former.
UK Circuits (CEM) based in Manchester is a market player in contract electronic services, where it provides design, manufacturing and testing for a diverse spread of clients spread across industry.
These amount to around seventy in total at present and includes the blue chip name of Rentokil through its large and expanding pest control division, which arguably provides for a good validation of the products.
Other areas aside pest control include gas detection, lighting, audio, automotive and general electronics where the company generated revenue last year of £6.9m and which returned EBITDA of £800k.
Those numbers which look decent, represented a 24% increase on the prior year and at present, having now listed, it currently has a n order book of over £5m.
Whilst that business is growing and importantly proving cash generative, the real excitement and potentially significant growth opportunity lies within its more recently formed Light Science Technology offering.
This is focused on serving the rapidly expanding vertical farming market sector that also takes in poly tunnels, large greenhouse operations and cloches.
In terms of valuation for the opportunity, the market was, according to Mordor Intelligence said to have been worth a massive US$2.71 billion in 2020, with a projected CAGR of 19.5% from 2021-2026.
Within this, the LST business provides specialist lighting, sensors and monitors along with lab services in order to ensure constant and effective operational functionality and importantly improved yields for those it will serve.
As part of the offerings in this field LST launched a prototype of its patent pending nurturGrow during the summer which provides a high-performance and cost-effective solution for indoor growers and has already picked up an industry award as of just last month.
Given the size of the market opportunity and the areas it is addressing, potential upside to the company in the coming years could be seriously extensive, providing of course things drop into place.
LST’s actual inception and being came about when team members from the core business collaborated with another company to solve specific issues that one of the first UK vertical farms was experiencing.
The resultant project delivered extensive luminaires, driver assemblies and horticultural LED’s, with the end result being improved efficiency, leaving the vertical farm on track to save £170k over four years.
With the company now admitted to the AIM, I have been fortunate enough to catch up with CEO Simon Deacon to hear more about both businesses and importantly, the prospects ahead which may subsequently attract new investors.
Deacon talks me through the debut at the market open before moving on to the businesses themselves, kicking off with the circuit division referred to as CEM.
“Our circuits business is a very well established operation based in Manchester and that really underpins what we are doing here.
This performed well overall during the pandemic where some areas were particularly strong, although a few better than others and it enjoys a broad spread of customers and end markets”.
Post the lockdown year, the CEO says that the trend of some areas benefitting with others less so continues, but that what they are now really seeing, is a lot of manufacturing coming back to the UK.
That clearly bodes well for a business like the CEM arm as Deacon explains. “It has now become really expensive to import, where container costs have risen sharply and also, they just aren’t getting them here in time. So, while Industry has operated very much on a just in time basis, just in time has suddenly gone out of the window”.
Deacon adds that much of what is being used across various end markets is now being made here in the UK and that is a trend which is likely to continue into the future.
This, he sees as a real positive for a business like CEM and he anticipates great growth continuing ahead, sounding an optimistic tone.
As mentioned at the outset, the CEM division boasts Rentokil via its pest control unit as a key customer, so this was an obvious area to touch upon. “We have a long and well established relationship working with them", comments the CEO, "but we could actually do more now.
They are a big and expanding company doing well and our relationship is good and a strong one, but having now come to the market I believe we will win more business from them”.
So, with that operation already firmly established and enjoying growth in its own right, we move on to the more blue-sky proposition centred around the virtual farming sector and the overall pipeline that currently exists.
And this is a key area from an investment perspective, as experience has taught me that a pipeline can often prove meaningless, with execution and delivery being the most important factors.
The CEO is quick to respond where he states, “our booked orders currently stand at a combined £18m, these are actually physical and in the draw. That is made up of £5m from the CEM division with £13m from the Light Science aspect, so with our year end coming up at the end of next month, that puts us in a strong position going forward”.
LST already has a significant contract in place with Zenith Nurseries that should be worth a sizeable £12.56 million in revenue over a period of 2 to 3 years following the the first twenty one month development stage.
Commenting on this specific deal, Deacon explained that it is only now that the company can actually confirm that the contract with Zenith is a solid one and firmly in place, as opposed to it previously being stated as a trial as was quoted at the time of the admission document.
It is very welcome news, highly significant and should go some way to further firming up the story and the wider prospects for this division.
In addition to that contract now being solid, there should also be news soon regarding an approved grant of £500k also relating to that deal. Separately, Deacon points out that other orders within LST now include one being being focused on the area of strawberries, which they are undertaking in the lab for another customer.
Speaking further on the Zenith deal the CEO says of the twenty one month timeline that has been quoted relating to the contract, as being on track. “It’s going well and it is quite good having an existing grant in place where money is released in tranches. That keeps everyone on track such as ourselves, the university we are working with along with the client”.
With a £40m pipeline in place that does not include the Zenith deal, LST looks ideally placed in a market that given climate change, and increasing scarcity of land for food development and water availability is likely to expand at pace.
But, what differentiates the business from others that are contributing or operating in the space, which is made up of numerous players.
Deacon answers, “In the CEA market we don’t have an exact and direct competitor, what we have got are lighting companies such as Philips and other real big boys who basically sell a product and that’s it. That isn’t our business, we sell a product where we want to partner with a customer along the whole journey.
If you look at our lighting aspect for instance, it is reusable which is a key usp, so when a light deteriorates over six or seven years, rather than replacing the whole unit we are able to just replace the innards, which saves the customer money”.
It is also I learn 90% recyclable, with environmental concerns and issues being implemented in the design process proving another big positive.
Within its complete offering there are also a range of sensors where therein, lies the real revenue generator which comes in the form of the information that it is providing the farmer or grower via a live stream.
Deacon says, “we will typically look to sign a six or seven year contract around this and work with the farmer where we can read what their current environment is, what they are growing and how it is performing”.
He adds that as part of the offering they then recreate the greenhouse environment being monitored within their own lab in Derby. Here, the company scientists are then able to gather, interpret and relay information that covers all aspects of performance and yield, from lighting, feed or watering being undertaken.
LST’s input will vary from just providing that information to the end grower where major players have their own scientists to initiate the recommendations, or a more hands on input for those operating at a smaller end of the chain.
Deacon reiterates that there is nobody else that they are aware of providing the whole turnkey solution that LST is delivering.
There are players doing lighting and others providing some sensors he says, but nobody else doing all of that and operating the lab that assesses the whole picture and providing the really key information too.
Although the vertical farming market is what Deacon describes as the sexy part, he says that the glass house and poly tunnel markets are massive and provide a major opportunity for LST in the years ahead.
There is also the area of medicinal cannabis to be considered as LST’s services are ideal for any growing environment and that appears to be another area that is attracting increasing market attention.
Deacon is clearly passionate and excited about the opportunities that lie ahead and stresses that the market LST is focused upon is ripe for growth. Key drivers as previously mentioned and which also include heavy CO2 emissions from agriculture and increasing populations, further underline the proposition.
With the likes of Katie Potts Herald Investment Trust on board along with the well known and highly respected David Evans and his related IIG quoted fund, LST would, all things considered appear to look a brighter prospect than many.
Over the next twelve months Deacon says that they have a lot of things coming up, so investors here should have plenty on which to focus and news to absorb.
Money raised has been earmarked for investment, expansion and marketing and the focus will be on a drive for growth and longer term sustainable profitability.
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