31/03/2008
Guided by former Schroders high-flyer Richard Morgan, Amphion Innovations offers investors low-risk exposure to a carefully selected and nurtured portfolio of technology partner companies. Each one has the potential for considerable asset upside from their ability to address very large markets, typically worth over $1 billion (£500 million) and is selected with the aim of growing the eventual market value to $100 million or more.
Partner companies are tightly managed by the experienced Amphion team, which has a formidable record, particularly in the life sciences and medical technology sectors.‘We are a company that builds companies and our raw materials are great inventions,’ explains Morgan.
As for Amphion, it recently piqued the interest of investors with news of a strong 2007. Net asset value (NAV) increased almost 30 per cent, pre-tax profits put on 50 per cent at $10.6 million and the company closed the year with robust cash balances of $4.6 million.
Strategy
Amphion aims to create value by building high-growth companies in the medical and technology sectors, which offer ‘great value-creation opportunities’. It does this by leveraging the management team’s company-building experience in the UK and the US.
Core to the strategy is the selection of strong intellectual property (IP), which forms the lifeblood of the companies it helps to establish. At the last count, Amphion and its portfolio ventures controlled over 150 separately identified pieces of IP, a number expected to grow to more than 200 in 2008.
But there is no scattergun approach to the technological innovations Amphion backs – managing director Jerel Whittingham explains that Amphion follows the investment
maxim of the legendary Warren Buffett: ‘Never invest in a business you cannot understand. Risk comes from not knowing what you’re doing.’
The group’s successful track record stems from a focus on a small number (somewhere between seven and ten) of partner companies, akin to another Buffett mantra: ‘Put all your eggs in one basket, then pay very close attention to that basket.’
The strategy involves an active, hands-on approach to investment. ‘We don’t just go on the board. We help these companies raise capital and we put the management together,’ says Morgan. ‘We provide the human resource and the advice and it’s a role we [the board] have played in many, many companies over the years.’
As a rule of thumb, the Amphion model accounts for adding one new partner company every year – last year’s addition was PrivateMarkets – with each company conducting a new financing round each year. Asset upside potential also lies in the one IPO or trade sale per year that the company is targeting.
Amphion insists on maintaining a large stake in each venture it helps to create, so that its assets increase as their value grows. If and when these companies raise finance, float or get taken over, the process could generate value for shareholders. Via its stakes in these companies and a Middle Eastern joint venture, Amphion holds assets in the US, the UK and the Middle East across technologies ranging from population genomics, nutrigenomics, molecular diagnostics, high-performance medical imaging and communications software.
For example, Amphion has a 25.3 per cent interest in digital X-ray systems star Durham Scientific Crystals (DSC), valued at $44 million and earmarked for an IPO, as well as a 15 per cent interest in WellGen, worth $61 million and involved in nutrigenomics for health and wellness. Other partner companies with potential include population genetics outfit Motif, where Amphion holds a 37.7 per cent stake, RFID systems business Axcess (7.47 per cent) and molecular diagnostics outfit myconostica, worth circa $16 million, in which Amphion holds a 35.7 per cent stake. With the addition of online energy trading outfit PrivateMarkets, the number of partner companies increased to eight.
Management
Collectively, the Amphion team has created and developed more than 30 technology ventures, including successful quoted ventures such as Veritas and Celgene, generating more than $20 billion in market value.
Richard Morgan, an engineering graduate and former Harvard Business School man, is chief executive. This start-up specialist founded the related Amphion Capital Partners, although he earned his spurs during a highly successful stint at Schroders where he not only supervised the management of more than $50 billion in investment assets, but founded and led the Schroder Strategy Group, which proffered strategic and financial advice to more than 100 companies around the globe. Demonstrating the active Amphion approach, Morgan currently chairs partner companies Axcess International, FireStar and Motif, and sits on the boards of both Celgene, quoted on Nasdaq, and WellGen.
Overseeing the numbers is finance director Robert Bertoldi, fellow Amphion Capital Partners co-founder and seasoned venture capitalist, having been directly involved in raising and investing more than $250 million in venture capital funds. During his career, he has amassed a wealth of experience in deal structuring, mergers and acquisitions, and public offerings, while launching numerous start-ups.
Another management lynchpin is managing director and former Durlacher man Jerel Whittingham, who brings bags of technology commercialisation experience to the table and heads up Amphion’s UK activities. Whittingham, who has worked on commercialisation projects at more than ten UK universities, is charged with identifying new investment opportunities as well as supporting the development of partner companies here and across the Pond.
Prospects
Amphion has already demonstrated its asset value creation credentials – since its IPO on AIM in August 2005, NAV has risen at a compound annual rate of 35.7 per cent in US dollar terms and 27.5 per cent in sterling. Last year’s 29 per cent growth to 22p was built on the back of significant ‘valuation’ progress made within its portfolio – demonstrating the quality of its partner companies and the fact that Amphion had a spread of companies at differing stages of development. Highlights included a contract with the Home Office for DSC for the development of handheld explosive detectors, as well as a patent award to WellGen for an anti-inflammatory black tea extract.
During the year, Amphion helped raise more than $21 million in funding for four of its partner companies.
This is particularly impressive considering the financial turbulence seen towards the second half of the year. Moreover, new funding rounds have forged ahead (albeit with slight delays), demonstrating a clamour for investing in these companies.
Morgan predicts a significant ‘liquidity’ event in 2008 – either an IPO or a trade sale – which should herald wider acknowledgement of the strength of the group’s business model. Such events could create lots of asset value, either through share price accretion post-IPO or through cashing in when partner companies are taken over by rivals in the market. Either way, the asset value upside for the Amphion shareholders is considerable.
Three IPOs look feasible this year, market conditions permitting, with DSC ‘at the head of the pack’ and WellGen and Motif not far behind. ‘As we start to take companies to IPO or some of them are acquired, you will start to see good cash flow from Amphion,’ explains Morgan.
The strength of the group’s recent numbers also underpins prospects, with revenues having increased more than 130 per cent to $2.9 million and pre-tax profits having risen 50 per cent to $10.6 million last year, as fair value gains on its investments rose from $9.7 million to $13.6 million. Moreover, this is a company with healthy cash balances of $4.6 million, which will help support its quest to create new tech ventures.
Valuation
The potential for NAV growth based on partner company progression is promising. Michael Armitage, an analyst at house broker Charles Stanley, is looking for a 2008 NAV advance of around 25 per cent to 27p, a figure which – if it is achieved – will leave the current share price looking behind the times. Armitage bases his NAV assumptions on a ‘pretty visible pipeline of valuation events’ and the huge growth opportunities afforded by many of Amphion’s target markets.
While the price-to-earnings (p/e) ratio is not really a suitable valuation measure for an asset play such as Amphion, it is worth pointing out that Armitage envisages profits of $12.7 million this year, before $23 million in 2009. From those figures, earnings of 4.6p and 8.4p have been pencilled in, placing the shares on budget prospective multiples of 4.7 and 2.6 for the next two years.
A sale or IPO of one of the partner companies should provide a powerful endorsement of the underlying asset values within the business, thereby triggering a rerating. On that basis, the shares are a strong buy for investors willing to show a degree of patience over the long term.
Growth Company Investor is the UK’s leading authority on small-cap and AIM companies. You can gain immediate access to all the recent share recommendations with no obligation, with a free 30-day trial. Click here to join today.
| AIM | £25.06m |
19.25p
|
0.00p
|
|
| Other company articles: |
| 31/03/2008 |
| 15/03/2007 |
| 26/08/2005 |
| 23/08/2005 |
