Nanoco has very bright future

Nanoco's cadmium-free quantum dots are in demand. They provide much better brightness, colour and power efficiency than existing LED technology, making them a must-have for the big electronics manufacturers. Finally, partner Dow Chemical is building a plant to make them, which means big profits for Nanoco. Even after surging by 20%, prospects appear undervalued.

A global licensing deal with Dow was signed early in 2013, but the factory in South Korea has taken longer than expected to get past the planning stage, held up by Dow's attempts to secure volume commitments from Korea's major television manufacturers. That backing has clearly been secured and other big names are likely.

That's why this is such big news and why investors have rushed into the shares. Nanoco traded close to 200p when the Dow deal emerged and was above 180p a year ago, but shareholders grew impatient and bailed out, sending the price as low as 85p.

But even at 147p, the shares could be cheap. Kicking off construction at the plant triggers a milestone payment, estimated at about $2 million (£1.22 million). Commercial production of Nanoco quantum dots - to be marketed by Dow under the Trevista brand - is expected to begin in the first half of 2015, followed by substantial royalty revenue for Nanoco, likely from the fourth quarter.

Broker Liberum is excited. It reckons the quantum dots will be sold at $80,000 per kilogram (kg), with each of the 21 million 55-inch TV sets sold annually using about 1gm. Even if only half use cadium-free dots demand could top 10,000kg. Tablets, notebook PCs and smartphones will use them, too.

We are therefore modelling Dow to expand capacity to 2,400kg by 2016 and further to 4,800kg by 2017," says Liberum, which forecasts an increase in revenue from £5 million in the year to July 2015 to £51 million in 2017, generating earnings per share (EPS) of 17.1p.

On Liberum's target multiple of 15 times earnings, Nanoco would be valued at almost 260p. "We therefore strongly recommend buying the stock here, which we see as an exciting long term technology growth story available at an attractive price," it says.

Expect more colour when full-year results are published on 14 October.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.