XL TechGroup looks undervalued ahead of spin-offs

XL TechGroup (XLT) is a US high-tech incubator company that came to AIM in October 2004. Its shares have since doubled. I reckon they have another 50 per cent in them over the next six to nine months as the market starts to look at the likely value of the next spin-off.

XLT is run by a group of technology specialists who, in the 12 years before they set up XLT, developed and sold-on six businesses with an average market value of $500 million. In their current incarnation they are focusing on opportunities in the biotech, ecotech and life sciences areas. Since the new issue in late 2004, they have already floated off one company, Agcert, which is a leader in the creation of carbon emission credits and ranks as a competitor to Ecosecurities, which I recommended here a fortnight ago.

Agcert has not been without its problems and there has been a major management change since it came to market. Still, it has piled up its book of emission credits and at the current 182.5p share price is valued in the market at over £300 million. XLT retains a 24 per cent holding, worth around £76 million. That sits well besides an all-in value of £145 million for XLT at the current 292.5p.

The next spin-off is likely to be TyraTech, which is developing a new class of non-toxic pesticides. These use ‘cloned insect chemoreceptors’ based on natural oils. Don’t ask me what that means because I haven’t got a clue. All I know is that TyraTech has signed at least two major licensing agreements with major horticultural chemicals firms. One of those agreements is with a Japanese company, Arysta LifeScience, which has annual sales of $1 billion. The other is with a division of Syngenta, which ranks as one of the world’s leading agribusinesses.

More licensing announcements are expected in the coming months, leading to a flotation of TyraTech in the first half of next year. XLT owns two-thirds of TyraTech, so the float is likely to make the break-up value of its portfolio a lot more visible.

There is a third major investment, in a biological testing and diagnostics business called DxTech. Claims for the technology are that it can replace tests undertaken at reference laboratories with a fully automated point-of-care device. As well as improving diagnostics in developing countries, it will produce new revenue for doctors in the US. That sounds a highly commercial move.

Other projects, including a recently concluded deal with the commercial arm of Arizona State University for an algae-based replacement for existing biofuel crops, are also on the books. Given the potential, the market capitalisation is undemanding. One to pick up and lock away.