Why Commissioned Research matters

What is key to attracting investor interest?

We interview Karl Tobieson, CEO of Swedish listed life science group MedCap, on what the company considers its key focus for attracting investor interest, what triggered its interest in Commissioned Research and what the service needs to entail to be of value for the company.

How would you briefly describe MedCap and your business model?

MedCap is a decentralised conglomerate within life science. Today we have two main business areas: pharmaceuticals and medtech. Our business model is to find companies that have been successful in the Nordic region, have established customer relationships, and where we see an opportunity for further development, such as helping them to expand internationally or boost their efficiency further. We constantly search the Nordic markets to find such companies

At MedCap we do two types of acquisitions, the first being to find companies that work as core platforms that we can build upon, and the second being to find suitable add-on businesses to merge with these companies.

You have changed the structure of the group into its current business areas in the past year, arguably making it more coherent and transparent. What prompted these changes?

We have gone from being mostly an investment company, towards being more of a pure decentralised conglomerate. Historically, we presented ourselves as a company interested in acquiring and developing other companies in order to eventually sell them. But we have found that when we reached the feasible exit point, we often felt there was so much more that could be done in the company. So, today we have a more long-term approach to our investments, and we have changed our business model to be more of a buy and hold approach; we keep the companies more or less forever, and continuously develop them.

The changes we have made have been much about clarifying what kinds of segments we are active in, and why we should be a buy-and-hold operator in these areas. These changes have also made our business model much more centralised and visible.

In 2016, MedCap’s listing was moved from Nasdaq First North Premier to the Nasdaq Stockholm main exchange. Did this change investor interest in, and views on, your shares?

Spontaneously, I would say that we have not experienced any huge change. But of course there is a quality aspect associated with being listed on the main stock exchange, rather than being listed on the First North exchange for smaller companies.

I believe the size of the market cap is a much more important factor for investors, because it determines which equity funds and institutions can invest in our shares.

We had an ambition to be listed on the main stock exchange to be able to utilise share buybacks and other equity-related tools, whose use is more limited on First North. We were lucky in the sense that there were not many companies doing IPOs at the same time as us, and the resources needed for such a process were relatively cheap. It was the right thing for us to do, but from the investors’ point of view I would not say that it has had a very large impact.

As a listed small cap company, what do you consider key factors for attracting investor interest?

Our company’s businesses are not based on any unique technologies or anything like that. For us it is much more about how the company develops operationally, to increase profitability, sales and so on. These aspects are much more important to us than anything else.

When we talk to small institutional investors, if they believe there is a positive trend in the company and an interesting equity story, the very first question we get is about the low liquidity in the share. They are hesitant to invest because they are unsure whether they could exit their position whenever they might want to.

As I mentioned earlier, if the market cap is too small, the company is not worth investigating for an institutional investor because, they cannot create any meaningful exposure anyway. There are some hurdles that you need to pass market cap-wise.

If you are too small, it is very hard to attract investor interest, especially if you do not have a very special and innovative technology.

We continuously focus on improving our operations and to increase our market cap in order to attract institutional investors.

For smaller investors, I believe it is of more importance that they feel they have sufficient confidence in our company to put their money into our business. They are more interested in the equity story and that it feels right to invest in life science because it is basically about “giving back to the society”. However, over time, it all boils down to if the company performs well or not. If it doesn’t, there will be no investor interest anyway.

You have Commissioned Research coverage of your share from Nordea and two other firms. What triggered your interest in this service?

From the beginning it was largely about getting a second opinion on what we are doing, to have it promoted in the market, and that it is produced by trustworthy and credible institutions. The platforms where this kind of research is available are good and illustrative. It is easy to get information about the company and to see it in a context with other, similar companies.

For us, it was a way to make the company information more easily accessible, and to get some more visibility.

We chose Nordea specifically because we wanted to get a more granular and thorough analysis, compared with the Commissioned Research services we already had. When we were out pitching our equity story to small and medium-sized institutions, we felt there would be value in getting a deeper analysis of the company, which led us to use Nordea’s service. Nordea also has a more established image and brand than the other firms that we use for Commissioned Research. We have especially noticed when we contact new potential investors who do not know us very well that it is much easier for them to grasp what we do if we send one of Nordea’s reports on MedCap, compared with if they only look in our annual report.

We have not really had a need for funding, and so no need for a specific valuation of our company. We consider Commissioned Research rather as a service for our current and potential new shareholders.

What does a Commissioned Research service need to include to be of value to you?

What is most of value for us is the distribution of the research to investors, the research itself (if it is high quality), and the provider’s brand and reputation. Like the Nordea brand, which adds a sense of quality to the analysis itself, since Nordea is a well-known and established bank. We also see great value in the fact that someone other than us is giving a view on the company. Even if the research doesn’t include very specific recommendations or share price targets, we think it says a lot about how the company performs and develops.

I also feel that you more naturally become part of a cluster of companies, and in this way also meet investors in another context, which you may not otherwise have access to. So, Commissioned Research can also include a door-opening function.

Do you have any needs or ambitions which are not met by current Commissioned Research services on offer? Anything you would like included in them going forward?

It depends partly on what is possible from a regulatory point of view. A more explicit view on the share price target would, of course, be desirable. Previously, we have had zero exposure towards international investors because of our limited market cap. This is exposure we are not able to attain ourselves, and I wish that we could see a bit more activity from Commissioned Research providers in this field. The smaller research providers especially have a rather narrow, Sweden-only focus. An even greater reach among retail, institutional and international investors for Commissioned Research would be desirable.

We have not used our Commissioned Research providers much for help with articulating our equity story, since it is rather straightforward for our company, but I believe this service could be of great value for many other companies. Generally, I believe that companies with a significant and perhaps recurring need for new capital have much better possibilities to get funding and interest from investors who could make money from investing in their shares, if they are covered by an analyst.

For MedCap, which is quite a “boring” company, without stellar organic growth or any cool new technology, the Commissioned Research service is of great value since banks or brokers would not take the time or have the incentive to look into our business. I believe you could embrace the nature of our business to create a segment and build model portfolios of “boring” stable companies that will always perform well. I think there is a lot more to do in the field of Commissioned Research in order to create even more interest. I think the service will evolve strongly in the coming years.

For more on this topic, please download our study: Nordea On Your Mind – Liquidity drought

Analysts

Johan Trocmé | Director, Thematic Research | +46 101 56 34 22 | Analyst info
Ellen Benktander | Analyst, Thematic Research | +46 101 57 28 87 | Analyst info
Hemming Svensson | Analyst | +46 101 570 966 | Analyst info

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