Questor: net cash on the balance sheet and a 32pc discount to net asset value – IP Group is a hold

Questor share tip: as a backer of tech start-ups it is more risky than most but some of IP Group’s investments are beginning to pay off

Russ Mould 18 August 2020 • 6:00am

The sale of a final stake in Ceres Power for seven times its cost price, continued positive developments at Oxford Nanopore (including adoption by the NHS of the LamPORE Covid-19 test) and record cash realisations from its portfolio of investments during the first half of the year all suggest that this column can keep the faith with IP Group.

The shares have already risen by more than a quarter since our buy tip in November last year and there could be more to come. The FTSE 250 constituent invests in, and works to commercialise, the intellectual property developed by British universities.

The well-documented travails of one well-known fund manager may have put many people off investing in early-stage companies for life and IP Group is not suitable for all investors – there is no dividend and there are also clear capital risks associated with investments in young firms.

They can either simply fail or require further investment and soak up more cash if they make progress, while even successful investments can take a long time to realise their potential.

However, the portfolio is progressing well, as shown by both £35m of net gains on disposal in the first half compared with last year’s losses and the 3pc increase in net asset value (NAV) per share to 108p.

The balance sheet has net cash and the shares trade at a 32pc discount to NAV. That provides some protection against losses and the portfolio of more than 120 life sciences and technology firms is unlikely to be too influenced by the domestic economy, no matter what it does in the coming months.

There is no yield and early-stage firms are risky by their very nature but brave, patient investors can keep backing IP Group.

Questor says: hold

Ticker: IPO

Share price at close: 73.8p

Update: Spirent

While all seems to be going well at IP Group it increasingly feels like this column got its wires crossed with an initially downbeat view on Spirent, the telecoms equipment testing specialist, in February.

The combination of a punchy valuation, as evidenced by a forecast price-to-earnings ratio in the mid-to-high twenties, question marks over timing in relation to 5G mobile networks in light of the debate over Huawei’s role in them and a steady slide in earnings forecasts put us off, for all of the company’s technical prowess and its debt-free balance sheet.

So much for that theory, as the shares have risen by more than a third. Despite a bit of a dip in America in the spring, Spirent’s overall order intake rose by 6pc in the first half of the year and momentum feels strong.

Despite a hiring spree, in sales and marketing in particular, first-half profits soared by more than 90pc and the company even raised its dividend by 12pc.

Most tellingly, earnings estimates are rising again. Analysts hoped for earnings per share of 9.1p for 2020 in February but the consensus estimate has since been chalked higher to 10.8p. One thing this columnist has learned in his 30 years or so in the markets is that it is rarely smart to be bearish on tech stocks when momentum in earnings forecasts is strongly positive.

The net cash on the balance sheet offers some protection too and our only niggle remains that forecast p/e ratio, which is still around 28.

Such a premium rating could cap near-term returns but Spirent is a key supplier in what should be a major, multi-year upgrade cycle for mobile telecoms networks and the long-term picture does look bright, especially as the chief executive, Eric Updyke, is working to enhance the percentage of sales that are recurring.

Our view to avoid the stock has been proved wrong and only the valuation precludes a buy stance. Shrewd holders can afford to be patient.

Questor says: hold

Ticker: SPT

Share price at close: 293p