Description

NFT Investments PLC, currently listed on the Aquis Exchange, is trading at a discount to its intrinsic value. The company has disclosed plans for a tender offer to be executed in approximately 12 months, offering a potential catalyst for value realisation. The expected return assuming constant crypto prices is 44 to 90%.

Owing to its listing on the Aquis Exchange, the company's shares are illiquid and the market capitalisation is low, suggesting suitability primarily for personal account (PA) investors.

The company went public in April 2021, raising a gross amount of £35 million, which also matches the net amount raised when considering pre-IPO fundraisers. The IPO was popular with investors, with demand outstripping supply by approximately three times. At the time of the IPO, the company's cash per share stood at 3.5p. The IPO was at 5p and the stock never traded above 5p since.

NFT Investments PLC set out with the intention of investing in NFTs and startups exploring technologies related to this field. This strategy initially attracted a broad range of investors, including a decent number of UK fund managers.

NFT Investments' Transition Towards Liquid Crypto Assets

Throughout 2021, NFT Investments PLC engaged in a series of investments in NFT-related ventures, aligning with their business model. For the sake of brevity, this analysis assumes these ventures hold no value.

Early in 2022, NFT Investments revealed intentions to acquire Pluto Digital PLC, a venture company involved in crypto technology. The proposed deal, a reverse takeover valued at £96 million, would also have included a £5 million loan from NFT Investments to Pluto Digital to facilitate acquisitions of technology firms in the metaverse sector. However, by April, NFT Investments had retracted its plan to proceed with the acquisition of Pluto Digital. This left a large part of the IPO proceeds uninvested.

In a significant development in January 2023, NFT Investments declared that it had spent US$16.26 million on purchasing Bitcoin (BTC) and Ether (ETH) between November 2022 and early January 2023, following the turbulence surrounding FTX. 

This strategic move implied that NFT Investments was now majorly vested in liquid crypto assets, putting less emphasis on their venture investments as mentioned earlier.

Management Background and Shareholder Dynamics in NFT Investments PLC

The management team of NFT Investments PLC, along with their advisors, has a track record of bringing initial public offerings (IPOs) to the Aquis Exchange. This exchange has lighter governance requirements compared to AIM, and much lighter compared to a premium listing on the London Stock Exchange. The team has also had involvement with Argo Blockchain PLC, which reached a market cap over £1bn. Key characteristics of their IPOs include:

• Capturing speculative thematics such as De-Fi, CBD, and NFTs.

• Pre-IPO rounds where the founders and close associates enter at 1p.

• Significant option grants to founders, close associates, and placement agents.

• Substantial related-party advisory agreements.

True to form, in February 2023, NFT Investments granted 85,000,000 options over ordinary shares as part of its long-term incentive plan. The Executive Chairman, Jonathan Bixby, and the Non-Executive Director, Mike Edwards, received 50,000,000 options, with the remaining 35,000,000 options going to key personnel at a strike price of 1p.

Given the lacklustre performance of the company's shares since its IPO, this decision by the management to issue themselves approximately 8% of the company at a strike price 80% below the IPO price was met with disapproval by some of the fund managers involved. This might have gone unnoticed, had it not been for the participation of several large UK fund managers in the IPO.

At that time, I estimated the distribution of fully diluted shares as follows:

• 15% with management, 

• 50% with passive retail investors (including retail platforms, SIPPs, and ISAs), and

• 35% with investors likely to show up and vote rationally on presented propositions.

The Companies Act 2006 allows for 5%+ of votes to call for an extraordinary general meeting (EGM), which obliges the company to consider proposed resolutions, including the removal of directors. Given this, a group of proactive shareholders holding more than 5% of voting rights challenged the management, leading to subsequent announcements.

Strategic Update and Future Plans

NFT Investments provided a strategic update on 20 March 2023. The management indicated their intent to return value to shareholders, “following the next Bitcoin halving event expected in April 2024”. They plan to liquidate the company's existing liquid positions and then return the capital to shareholders via a tender offer. Alongside this, the company pledged transparency, vowing to publicly share its token holdings and their prices quarterly, with the first update scheduled for 3 April 2023.

The promised “Q1 Crypto Holdings Trading Update” arrived on 3 April 2023, revealing an unaudited valuation of the company's crypto assets. The portfolio was primarily composed of Bitcoin and Ethereum, but also included smaller positions in various tokens such as Optimism, Lido Dao, Cosmos, Near Protocol, Flow, and Polkadot.

Following this, on 11 April 2023, NFT Investments unveiled its plan to purchase a significant amount in shares through a tender offer. The precise price for the tender offer is still undetermined, and will be contingent on future Net Asset Value per share or a set minimum per share. A General Meeting has been arranged for 26 May 2023 to seek shareholder approval for this planned share purchase.

Intrinsic Value, Current Discount and Expected Return

Sources: company, Bloomberg and coinmarketcap.com

Considering current mid-prices, we're looking at a discount of 31%, translating into a potential return of 44% over a year to the catalyst, assuming cryptocurrency prices remain constant.

As of 20 March 2023, the implied value of the retained venture investments (which is assumed to include cash not classified as "liquid crypto") was at 0.74p per share. If this value holds steady, it would imply a current intrinsic value of 3.08p per share, using a fully diluted share count. This suggests a potential upside of up to 90% over a one-year timeframe.

Catalyst

Tender offer in 2024, after approval at the GM on the 26th of May 2023.