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Questor: this investment company is back to trading at a big discount so we’ll hold on

·4 min read
ip group
ip group

Record gains from the portfolio in 2021, an increased dividend and a share buyback programme that is being carried out sensibly – in other words at a discount to net asset value per share – all suggest that there remains plenty of potential in IP Group.

In all honesty, this column has not been quite as savvy as it could have been with the shares of the firm, which incubates, nurtures and commercialises intellectual property. In the wake of last autumn’s flotation of Oxford Nanopore, one of its holdings, IP Group’s shares briefly traded above their historic NAV.

That is rarely a good thing in the case of a company like this, as it means a lot of future good news is being priced in and not much, if any, bad. Such an asymmetric risk-reward scenario rarely ends well.

Sure enough, the shares have rattled back from a peak of 155p to 95.3p as the departure of long-time chief executive Alan Aubrey and chief investment officer Mike Townend and a 40pc slide in the share price of Oxford Nanopore, where IP Group retained a 10pc stake, have weighed on sentiment.

There is no point crying over spilt milk and IP Group has again started to trade at a hefty discount to NAV, which, all other things being equal, still looks to be around 140p a share after this year’s falls in Oxford Nanopore, compared with the year-end figure of 167p.

The current one third discount is not as big as the 50pc-plus gap that prevailed when Neil Woodford’s woes compelled his funds to dump 13pc of IP Group’s shares so that they could raise cash in late 2019. This column stepped in at 58p a share in November of that year to take advantage of the forced sales.

Even so, it may prompt some investors to consider whether there is now some value to be had, especially as 2021 was the third year in a row in which IP Group realised more in cash from its portfolio than it put in, to show how positive momentum has continued to build.

In this it was helped by the sale of Inivata, WaveOptics and Kuur Therapeutics, as well as proceeds from the Oxford Nanopore deal.

New boss Greg Smith also plans to refine the portfolio slightly and, if any more unicorns – start-ups valued at more than $1bn (£759m)– emerge from IP Group’s portfolio of investments, to join Ceres Power and Hinge Health, there could still be plenty of scope for gains in NAV per share.

The most likely candidates for unicorn status to watch right now include Featurespace, a predictive cybercrime analytics firm, Istesso, an autoimmune disease specialist, and First Light Fusion, an energy source developer.

All three already have valuations in the hundreds of millions of dollars and IP Group owns stakes in them of 19.5pc, 56.4pc and 28.4pc respectively, with a book value of £194m or 18p per share. Meanwhile the discount to book value hopefully provides some protection against risk although there are still caveats of which investors need to be aware.

The first is that there is no guarantee that the portfolio holdings in early-stage companies pan out as hoped, although the spread of 100 or so stakes provides some diversification. The second is that rising interest rates are a potential enemy.

This is because one way in which the portfolio of shareholdings in ­early-stage companies will be valued is by a technique known as the discounted cash flow model.

Forecasts for future cash flows, which assume a terminal growth rate, average operating margin and capital investment requirements, are discounted back to a “net present value” using a discount rate.

The higher interest rates go, the higher the discount rate will go and the cold, hard mathematics of that means the theoretical equity value of an individual company goes down as the discount rate goes up.

Anyone who thinks the Bank of England is going to start jacking up Bank Rate beyond the 2pc currently expected by the market for the end of 2023 may well decide to bank a profit on the shares if they have a holding or avoid them if they do not.

But our view is that the stock remains a good value option for long-term, growth-oriented investors. Hold.

Questor says: hold

Ticker: IPO

Share price at close: 95.3p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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