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Questor: discounted valuation offers scope for gains if IP Group’s portfolio starts to deliver
Questor share tip: recent sale at a premium of stake in DNA firm contrasts with the discount that the market places on the overall company
It is very early days but we are off to a promising start with IP Group, the intellectual property incubator and commercialisation specialist.
There has been little news from the company since our initial analysis in November but the share price has still enjoyed a modest fillip, to perhaps offer some credibility to our theory that the stock has been oversold following the fire sale of a 13pc stake by a certain embattled fund manager last year and a multi-year share price slide.
At 67.7p, the shares trade at a sizeable discount to the last stated net asset value of 110.6p a share. There are clear dangers to investing in early-stage companies, not least that they can turn into cash sinks or simply fail altogether, but such a discount factors in a lot of the dangers.
That valuation offers the potential for gains if the portfolio of investments, spread across more than 130 firms, starts to deliver, and IP Group did enough in 2019 to suggest that the portfolio’s potential may be under-rated by the market.
In 2019, the firm, a member of the FTSE 250, realised more than £75m of cash from its portfolio, and that is before the £22m partly realised from Oxford Nanopore, the DNA and RNA sequencing specialist, when it raised £29m in new capital and sold £80m of existing shares just before the festive break.
The price of that deal represented a small premium to the valuation implied by Oxford Nanopore’s previous financing round in March 2018.
Again, that represents a marked contrast to the discount currently applied by the market to IP Group overall. In addition, the company had more than £40m in net cash on its balance sheet as of June and that buffer appears to have gone up in the second half to offer further protection against mishaps.
This is not a stock for widows and orphans by any means and patience will be required but the valuation will tempt patient contrarians.
Questor says: hold
Ticker: IPO
Share price at close: 67.7p
Update: Nichols
The news from Nichols, the maker of soft drinks, is unfortunately less encouraging than it is from IP Group and for the second time in three years the culprit is the Middle Eastern business.
In December 2017 the firm warned of a hit to profit forecasts thanks to a collapse in its sales in Yemen, a result of the ongoing conflict there and a blockade of its key customer for concentrates in the country.
This time around the problem is a tax in Saudi Arabia and the UAE on non-fizzy sweetened drinks, which cannot be resolved through a reformulation of the product.
Some £7m in concentrate sales to Saudi Arabia and the UAE is in jeopardy. Although this is barely 5pc of group sales the company has been planning heavy investment in marketing across the whole Middle Eastern region, which is a key market for the Vimto product.
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The impact of the tax on demand will become clear only after Ramadan, which this year runs from late April to late May, but management has already thought it prudent to warn about next year’s earnings.
Analysts have cut profit forecasts by some 15pc, the shares have dropped by a similar amount from their recent peak of £17 and it is hard to find a near-term catalyst that will help them recover that lost ground, given the forecast price-to-earnings ratio of around 20.
As a result the stock is probably dead money for now, but returns on capital remain lofty, the balance sheet has net cash and the company is well run, so we shall just have to swallow this setback and content ourselves in the near term with collecting the annual dividends.
The yield may not be huge at 2.8pc but it looks solid and we will stay patient with Nichols.
Questor says: hold
Ticker: NICL
Share price at close: £13.80
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.