James Carthew: Seraphim Space bumps back to earth

Shares in the pioneering space commercialisation investment trust have tumbled after their initial takeoff last year, but could revive if the company fulfils its exciting potential.

Just 10 months ago, Seraphim Space (SSIT ) managed to raise £150m from investors in an oversubscribed initial public offer (IPO). Stakes-for-shares swaps expanded the company, exuberant markets drove the shares to a 32% premium above net asset value (NAV), and by the end of 2021 the investment trust had a market value just shy of £300m.

However, as we all know, the market’s mood has changed. As I write this the share price is 92p, 11.5% below the recently announced 31 March NAV, and I fear the discount may widen from here.

Citywire’s Algy Hall last week published a great roundup of the state of the space sector highlighting the lack of mainstream fund managers active in the area. SSIT is unique – there isn’t a US equivalent, for example. It just held its first capital markets day with analysts and institutional investors and updated the market on progress within the fund. Attendees got to hear from some of the chief executives of the companies in SSIT’s portfolio.

Investors can take some comfort from the NAV performance to date. Even though the two listed businesses it holds – Arqit and Spire – have dived during the growth sell-off, an uplift in the value of one of its unlisted investments – D-Orbit – more than offsets this.

The portfolio represents a collection of really cutting-edge scientific solutions often addressing issues of which you may have been only vaguely aware, or brand new markets. The numbers bandied around are vast – alleged total addressable markets in the billions – and exponential growth rates targeted. However, in the more cynical environment that we now find ourselves in, basing a sales pitch on such metrics almost feels counterproductive.

The largest position at 16% of assets at the of end of March is a Finnish company ICEYE. It was one of the investments that the trust acquired from the manager’s older limited partnership vehicle. ICEYE has an operational constellation of 16 small satellites surveying Earth with radar which allows it to operate at night and in cloudy conditions, taking images of locations every 24 hours. It is being used by insurance companies to monitor things like natural disasters.

ICEYE raised $136m in a Series-D fundraising led by Seraphim Space in February. SSIT’s managers suggest that it could be looking to float later this year, markets permitting.

The next-largest position at 12.8% of assets was Arqit Quantum. It is a listed company, having reversed into a special purpose acquisition company (Spac), or what we used to call a cash shell, last September. Its share price has fallen by about 60% since the end of March, caught up in the general market malaise, and that will have taken about 8p off the trust’s 104p 31 March NAV. The other listed position – Spire Global – has been similarly afflicted and that will have taken another 0.5p off asset value per share.

Advances in quantum computing pose a threat to existing encryption standards, including those underpinning blockchain. Arqit has devised a system of symmetric encryption keys – where data is encrypted and decrypted using the same key, and the key is transmitted securely between the sender and recipient of the information. Transferring quantum information over fibre is only secure over short distances. Arqit transmits quantum information by satellite instead.

Even after the share price fall, Arqit has a market value of about $740m, down from a peak of about $4.5bn. Recently published half-year figures from the company, which is only just starting to commercialise its technology, disclosed revenue of $12.3m of which $5.3m related to its core Quantumcloud business. It held $82m of cash and had burned through $13.5m in six months. Markets are bad at valuing these sorts of businesses and to my mind it has listed too early. Perhaps someone will opt to take the company private again.

Number three in the portfolio is Isotropic Systems. Chief executive John Finney gave a fascinating insight into the development of its system for communicating with multiple satellites in different orbits simultaneously. Until now, all communication with satellites has been on a one-to-one basis and even defence-funded research bodies had been stymied by the problem. Isotropic’s technology is a significant boost to communication systems and has applications in a wide range of fields. It is scaling rapidly. All of this year’s production slots are already sold out and much of next year’s. Finney reckons Isotropic may be ready to float in 2024.

The other two firms investors heard from were Astroscale and D-Orbit. Astroscale is looking at ways to manage the proliferation of potentially dangerous defunct satellite and orbital debris. Part of the problem is persuading governments and companies that they need firm plans for managing the issue, including stumping up the necessary funds. However, it is working with OneWeb on de-orbiting defunct satellites – locking onto docking plates installed on the satellites before launch and steering them towards burn-up on re-entry. Larger satellites can be aimed at the Pacific Ocean.

D-Orbit, whose focus is on space logistics, and already has operational vehicles taking satellites from SpaceX rockets to their final orbits, has grander ideas. It is experimenting with alternative uses for its ION satellite carrier spacecraft once their mission is complete. It is exploring ways of refuelling failing satellites and recycling them in space once they are defunct. That makes perfect sense to me, given the cost and effort required to get them up there.

The write up in the value of D-Orbit came as it is in the process of listing, again by reversing into a Spac. That deal, which was announced in January and is supposed to complete over the next few months, values D-Orbit at $1.4bn. The Spac, Breeze Holdings Acquisition Corp, still trades around its $10 launch price, but anything could happen in the aftermarket.

SSIT is a pioneer and path-breaking trails are often fraught with danger, but if the fund fulfils the vision of its management team, the rewards could be significant. One for adventurous bargain hunters.

James Carthew is a director at Marten & Co. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.

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