Small caps entering new horizons

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Small caps entering new horizons

Master InvestorThe small caps entering new horizons, Wednesday 13, June 2018

Small cap investors love spectacular returns. And some of the most spectacular returns seen from small cap shares over the past few years have come from companies which have taken advantage of growing demand for completely new products.

Take Accesso Technologies (LON:ACSO), for example. Named Lo-Q in its early days as a listed company, and with a market cap of only a few million pounds, the company went on to flourish by providing theme parks with a nifty gadget that helped customers to electronically claim their place in a queue for a rollercoaster. This helped to improve guest satisfaction and freed up time for them to do other more productive things like spend money on hot dogs. Accesso built on its early success to now be a wider provider of technology solutions to over 1,000 clients in 27 countries around the globe. Shares in the company recently hit an all-time high of £25, up from just 28p at the same time a decade ago.

In a similar vein, other companies have seen huge returns from selling already existing products in completely new markets. ASOS (LON:ASC), for example, came out of nowhere in 2001 to take advantage of the explosion in demand for buying fashion online. Driven by a shrewd management team, along with some quirky and cutting edge marketing, shares in the company are currently up by 202,977% since hitting a low of 3.25p in August 2003.

While is it difficult to know with certainty what the next big thing will be, there will always be a number of dynamic small cap firms listed in London which are looking to ride the wave of opportunity. As young companies operating in developing markets most of these will be highly speculative investments. But as we have seen in the past, even one single success story could see long-term returns worth many, many multiples of an early stage investment. For the brave investor, here are three small caps which I believe offer that kind of potential.

 

SATIVA INVESTMENTS

Like David Cameron, I too had a “normal university experience”. But little did I imagine 15 years ago that what was then a taboo industry would soon become a growing and potentially lucrative, and legal, investment opportunity. I’m not talking about pigs’ heads here but cannabis – also known in its recreational form as African broccoli, grandpa’s medicine, jazz cabbage and by thousands of other creative slang terms.

Recreational use of cannabis remains largely illegal, or at least illegal but decriminalised or unenforced, in most countries around the world. In this context it stays well off the investment agenda. However, recent years have seen a liberalisation of laws in many jurisdictions for use of the plant and its derivatives in medical and scientific applications. Some countries where weed is now legal in one or both of these contexts include Argentina, Australia, Canada, Denmark, Israel and the Netherlands, with medical marijuana now broadly legal in 29 US states.

In 1961, cannabis was recognised under the United Nations’ Single Convention on Narcotic Drugs as a plant that no longer served any medical purpose. However, research carried out in recent years has found that cannabis has a number of benefits in a medical context, including pain management, treatment of muscle spasms and treatment of nausea associated with chemotherapy. While research on the subject remains limited, mainly due to the drug’s historic illegality, the discovery of these benefits has led to a growing acceptance of cannabis for medical use.

 

Joint venture

Looking to take advantage of growth in the industry, in March this year Sativa Investments (LON:SATI) completed the UK’s first medicinal cannabis investment IPO, listing its shares on the junior NEX Exchange and raising £1.1 million. This gave it a net £1.548 million for investment opportunities. The company is looking to put its cash into businesses which focus on the production, testing & compliance, research & development, commercialisation and sales & marketing of medicinal cannabis in jurisdictions where it has regulatory acceptance, with an initial focus on Canada. 

Crucially, Sativa has committed to an independent legal review prior to each investment to verify compliance with the prevailing regulatory environment. Canada, where medical use of marijuana has been legal since 2001, seems a good place to start, with forecasts from Brightfield Group looking for the medicinal cannabis market in Ontario to grow from C$379 million in 2018 to C$2.22 billion by 2021.

Since going public Sativa has announced three notable investment agreements. In April, the company signed an MoU to buy 51% of George Botanicals, a UK-based manufacturer, wholesaler and distributor of wellness CBD products, for c. £0.2 million. CBD, or cannabidiol, is a chemical produced by the cannabis plant and as a food supplement is legal in the UK. George Botanicals has been providing its customers with CBD products since September 2017, including vape pens, balms, E-Liquids, drops and edible gels. 

Then in May the company announced a C$0.2 million investment in Canada based pharmaceutical company Veritas Pharma Inc. Veritas focuses on the discovery, product development and commercialisation of effective patented medicinal cannabis therapies which target disease conditions in the areas of chronic pain, senior long-term and palliative care. This deal was followed by a C$0.2 million investment in Toronto-based Rapid Dose Therapeutics Inc, a business which has a patent-pending technology, QuickStrip™, a fast-dissolving strip that is placed on or under the tongue, or inside the cheek, for the delivery of medicines.

Shares to get high?

Shares in Sativa currently trade at a mid-price of 2.5p on the NEX Exchange, capitalising the business at just over £10 million. That valuation may be well ahead of the net cash position as at the IPO date but reflects the huge growth opportunities in the medicinal cannabis market – analysts at market research firm Technavio forecast the global medical marijuana market to grow at a CAGR of 21.11% during the period 2018-2022.

Overall, I believe the shares provide a unique way to play this exciting growth market, with the firm’s investment approach giving it fund-like characteristics in terms of diversification. It is also worth noting that CEO Geremy Thomas owns c. 55% of the company and has a successful track record of building up and selling businesses.

To read the full Mastor Investor article click here

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