Syncona 19 March 2021
Disclaimer
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Syncona (LON:SYNC) founds, builds, and funds life science companies, seeking to build a relatively concentrated/high conviction portfolio of up to 15-20 companies. It aims to invest at a very early stage, partnering with academics and takes a long-term approach, seeking to maintain a majority equity stake over a company’s development. SYNC has the flexibility to run winners, such that the portfolio can be very concentrated.
The majority of SYNC’s companies will be located in the UK or Europe, which the managers see as rich ground for life science innovation and enabling for their operationally intensive, partnership approach to building portfolio companies. A key part of the strategy is that SYNC aims to start investments small (which reduces the financial risk) and add to investments as businesses progress and ‘de-risk’.
Since 2016, SYNC has had some strong successes. The portfolio is currently dominated by two listed holdings (Freeline and Autolus), with one other holding (Achilles) having announced it intends to float. In the interim results presentation, the managers highlighted three companies that were approaching the start of clinical trials: Quell, SwanBio and Anaveon, which represents the springboard for value accretion (assuming the trials are successful).
Given a majority of the portfolio companies are expected to absorb capital for the foreseeable future, one of SYNC’s core strengths is its balance sheet. Of total assets of c. £1.3bn, around 43% represented by cash.
Whilst SYNC sits in the AIC’s Healthcare and Biotechnology sector, it is very different to peers. SYNC aims to set up 2-3 companies per year, to deliver a handful of companies (3-5 over a 10-year period) to the point of product approval, whilst still owning a significant proportion of the equity of the company. This points to the key value-add provided by the manager, but also the high hurdles that each company must overcome to be successful. Whilst the number of winners from the portfolio will be relatively low, the financial rewards to SYNC will be very high if they are achieved.
We would expect the NAV progress of unquoted investments will reflect each company’s progress and will not reflect or echo that of the wider market. That said, it will be dominated over the short term by the two largest holdings which are both listed.
SYNC currently trades on a significant premium to NAV. Numis provide an estimated NAV of 185.5p, to which the shares trade at a premium of 36%. One might look at this premium differently, assuming cash and quoted shares are valued at par, and then calculate the implied premium of the unquoted investments (31% of NAV as at 31/12/20). Using this methodology, the shares trade at an 84% premium to SYNC’s unquoteds.
It is hard to make a judgement on the premium. Should any of the unquoted companies be successful, then a valuation based on cost is likely to be very conservative. On the other hand, these are risky investments, and SYNC has shown over its short life so far that there will be losing investments as well as winners in the portfolio.
|
BULL |
BEAR |
| Unique approach, with deep well of expertise not likely found elsewhere |
Highly concentrated portfolio, with significant exposure to two listed companies |
| Some strong successes so far delivered by the team |
Illiquid investments, in many cases not generating revenues and a long path to profitability or exit |
| Clear positive impact on society, both from investments made and charitable donations |
Premium is very high, and subject to changes in sentiment |
