There’s more to IP Group than Oxford Nanopore

With management confident about the future, here are the reasons I believe that IP Group appears undervalued after a recent slide in its share price.

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With a business model that commenced over 20 years ago, in partnership with the research departments of some of the UK’s leading universities, IP Group (LSE: IPO) has developed into a key player in the creation of new high-value businesses, focused on the life sciences, clean technology and IT sectors.

However, despite an impressive track record – IP Group has played an integral part in the establishment of over 300 companies, with nearly £1bn of its own money directly invested – why is it that the share price of this FTSE 250 company has suffered so much over the past six months?

From a high of over 155p in September 2021, its shares have now fallen to less than 93p at the time of writing, valuing the company at approximately £984m. Notably, this is very close to the cash cost of its investments over the past 20 years, and substantially below its last reported net asset value (NAV) of 135p per share. 

A recent financial update (posted on 13th January 2022) painted an upbeat picture, with an anticipated FY21 NAV of over 165p, full year’s profits in excess of £425m and a cash buffer of £256m.

At 20 years old, the company is well past the stage of being a new kid on the block, and a look at its regular RNS announcements shows a solid track record of achievement. These include a number of lucrative exits in 2021, as well as the impressive IPO of Oxford Nanopore (“ON”), one of the first companies identified by IP Group for investment back in 2005.

The big question is, therefore, why the slide?

Well, clearly this is something the company’s board don’t understand either. Since the middle of last year, they have dedicated a war chest of some £35m to a continued share buyback scheme. The management clearly believe that there is substantially more value to IP Group than the market is recognising.

Possibly the perception is that IP Group is too heavily reliant on its investment in ON, and it is true that even after a 30% slide in the share price of ON during January, IP Group’s holding in the company is still worth over £250m (or around 25% of the current market cap of IP).

The reality does appear to be different, though. A well-diversified portfolio of over 30 companies has the potential to continue the company’s established track record of development, growth and exits.

Perhaps it is also the lumpy and less-than-transparent nature of these revenue streams that causes investors to shy away. This is maybe the reason that IP Group has started to pay a dividend over the last year to win back confidence. Expect this dividend to grow if full-year profits meet current expectations.

One should not forget as well that IP Group’s activities now include a solid bank of complementary revenue streams, including the separately managed private Venture Capital Fund and the well-respected EIS manager, Parkwalk Advisers (acquired in 2017), with over £400m under management.

I keenly look forward to the release of its final results in March, but in the meantime — since I’m prepared to assume a little risk — there appears to be substantial upside to this misunderstood sleeping giant, and I’m strongly considering buying more of the shares for my own portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Fergus Mackintosh owns shares in IP Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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