The below are my thoughts in direct response to the CEO of Avacta Group plc, Alastair Smith, writing a letter to the Times earlier this year about the UK markets not attributing value to life science companies, driving them overseas. This can be found here:
https://www.linkedin.com/posts/alastair-smith-1b4b9111_times-letters-30-jan-2023-activity-7025777741383770113-ixbg?utm_source=share&utm_medium=member_desktop
While I have some sympathy with this argument, I don’t believe the issue is related just to life sciences and I don’t believe ‘the market’ is solely at fault. The real underlying issue for so many AIM companies is communications that could be vastly improved.
For disclosure, I am a long-term shareholder of Avacta and intend to be so until its value is fully realised. I have greatly admired your integrity and diplomacy in the last 2-3 years and believe that Avacta is indeed hugely undervalued and underappreciated. I hope these thoughts are taken in the constructive and supportive manner in which they are meant, despite being presented in the direct and fluff free manner that I look for from company communications. I am an advocate of the business and the investment opportunity.
However, I am always reminded of the classic line from Jerry Maguire, which if you’ll permit me to slightly butcher, “Help us, to help you”. As with many other AIM listed companies, you would like investors to value the company on a more realistic basis but are not providing the tools and environment for them to do so.
The market is not driven by fundamentals over short time periods. It is sentiment and narrative driven and all market participants have their own agendas. Your case in point – a month ago, Avacta’s share price was 64% higher than at the close yesterday. As far as I am aware there has been no news and no change in the company’s fundamentals that would warrant such a swing, so one of those valuations must be wrong. I would argue both are wrong.
While many management teams would love to sit back, say that they are fundamentally undervalued and not have to engage with investors as it distracts from the day job, this only works when the business is doing the talking and the financial results are screaming how good the business is. Earlier stage companies don’t have this luxury.
Investors and valuation are important for a number of reasons you know well. Companies need to understand this audience much better if they want to enjoy the benefits of supportive shareholders and a reasonable valuation. You are in the business every day. No-one knows it better than you or understands the potential like you do. Everyone else is busy.
You’re competing with 1,000s of other investment opportunities. In investment banking presentations to clients, we used to limit ourselves to 10 pages. If you couldn’t make your pitch in 10 pages to an executive team or board you were wasting your (and their) time. In today’s world if you can’t explain in 1 page you’re done.
Your recent Science Day was publicised to investors. It was full of hugely interesting insights and data, but was not at all for investor consumption. Even the most specialist of sector investors might have struggled with the material, let alone the majority of the institutional investment world. Additionally, it was originally publicised to be held in September 2022 and was eventually held months later in February 2023. The are obviously good reasons for that, not least being the extraordinarily brave patients participating in your trials and the unpredictability of the terrible illnesses they’re suffering. But you set 2 expectations – timing and investment content. I would argue that unfortunately, you met neither.
The solution to the valuation issue is so simple and so easy to rectify if your business is truly performing and meeting or exceeding expectations. Good communications. The market is full of people who are willing to drive the narrative for their own personal gain and they are effective at doing so if you leave a void for them to go to work. Control the narrative. Human beings are programmed to ‘fill the void’ in the absence of factual information, and the default is to fill it with worst case scenarios.
I still don’t understand why AIM company boards and management are so reluctant to communicate effectively, particularly when it costs nothing. I can’t work out whether boards are receiving poor advice from their NOMADs, or whether they are getting good advice and ignoring it because it isn’t what they want to hear.
It is also baffling that companies are reluctant to listen to advice from investors even on the investment matters where they are the experts. Of course, that won’t stop me from adding my penny’s worth! The below thoughts apply not just to Avacta, but to many other AIM listed companies:
- Set out a plan and your expectations and be accountable for it. Plans can change but you need to set expectations and either meet them or promptly and factually explain why you didn’t. If something is delayed or going wrong, people always want to know so they can respond to it in the right way. If they get bad news after the fact or not enough information to fully understand what is happening, they are left just to react. You always get a better outcome if people are responding rather than reacting.
- Don’t hide behind commercial sensitivity. What is your strategy for each asset, or even each division? So many companies state they can’t provide any details for commercial risks, but I find in most cases it is driven by a fear of being accountable. Manolete Partners are a good example of how to do this right – their presentations clearly set out their economic model so investors can understand it and take a view. In many cases, it is difficult for investors to even work out how a company makes money. How can they invest without that most basic knowledge?
- Set out your investment case on 1 page and state the ‘no brainer’ value proposition. This doesn’t have to be precise when you are so egregiously undervalued. Your valuation is currently driven by the chance of success of AVA6000. On even conservative assumptions of market size and likelihood of trial success, Avacta’s share price should be multiples of its current price. The market hasn’t attributed a reasonable valuation because you haven’t clearly articulated with even high-level numbers what the revenues could be or provided your own informed view on how well the trial is going. I understand there are regulations not to fall foul of, but you can easily convey a viewpoint by third party example and extrapolation that isn’t a financial forecast. You are asking others to back your valuation when you won’t back it yourself.
- Speaking of backing yourselves, a broad point for managements and board everywhere. Investors back you with their own money and buy shares. Options, particularly nil-cost options or unchallenging performance-based options show a total lack of conviction in your business. Put yourself in investor shoes and buy shares – you will feel and act differently, for the benefit of all parties.
- You know the business inside out, but you need to write communications for outsiders and for the audience you’re talking to. It is so easy to assume a base level of knowledge, but we all know what assumption is the mother of… Investors will pour over the nuance of every word and vagueness will destroy any benefit of an otherwise good update.
- Reputation takes years to build and seconds to lose. Once it is gone, it takes years to rebuild any sort of trust. Don’t be promotional, but build a track record of clear, effective communication for good and bad news that investors can trust.
- Use the right communication channels. It you want to be taken seriously like a FTSE 100 company, learn from what they do.
It’s easy to blame the UK markets and they are far from perfect. You have lots of advisors highlighting the lure of the US markets and promising investor attention, but I have seen plenty of companies waste time and money on a US listing only to have their prices crater while garnering no investor interest because the root cause of poor communications hasn’t been fixed. The only sure thing about a US listing is that all those advisors will generate fees whether your valuation improves or not.
You correctly highlight that valuation matters. You and investors fear a buyout at a low price but the truth is most acquirers have no idea how to do public deals effectively and so it just boils down to price. Then you need a board with backbone. Shareholders shouldn’t need to fear a low-ball bid. They only need to fear directors happy to take the easy route, declare victory at a modest premium and move on to the next board role. If the board truly understands the fundamental valuation, they can just say no to a price that isn’t fair and recommend that shareholders do the same.
Focus on articulating the story through the correct channels. The market will get it, but it’s your responsibility to show them the way.
Nick Hargrave
MHM Founder & CEO
