 At this moment in time IPO is unloved and firmly out of favour, which is arguably the best time to buy. The share price has now dipped below its Covid low of 41p seen in April 2020. Seems crazy. What on earth is happening here?
This is a stock I’ve kept tabs on for almost a decade, though never really considered it a serious investment proposition until recently. In June the share price fell 22% which prompted me to take a more thorough look at IPO and convinced myself to make an investment. I’ve subsequently made three purchases this past fortnight ranging from 40.6p [today] to 43p. My aim is to double my money c.85p within a timeframe of 2-3 years.
I’d definitely classify IPO as a slow burner, many of their investments [c.66 holdings] will take years [if ever] to reach fruition. That said, I do think the market is completely ignoring the huge potential here. Based on current price 40.5p, IPO currently trades on a 65% discount to NAV [114.8p @ 31 Dec 2023]. Ultimately, I see this as a dull, boring, under the radar, recovery play. My favourite kind of investment.
Right now I think IPO is grossly oversold. I can find no logical explanation for the heavy fall in June, and despite positive snippets of news of late this has been completely ignored by the market. These past few weeks the share price has been trading in a tight range c.41-43p, hopefully a sign the decline is bottoming out. Does beg the question, what’s driven the price down to these levels, especially when you consider we are in the midst of a share buyback programme. Well, for starters this particular sector [early stage investment vehicle] is clearly out of favour, the primary problem being a high degree of scepticism with start-up valuations.
Take ONT [Oxford Nanopore] as example - floated on LSE in Oct 2021, initially valued at £3.6bn [425p], quickly surged 40% within a few months [710p]. Today it’s valued at £1.05bn [120p], down c.72% from its flotation price and down 83% from its all time high. Many investors will have incurred heavy losses, sucked in by the hype, left with nothing but a bitter taste in their mouths. For many it will be a case of once bitten, twice shy. So you can understand why the market is very weary with these valuations. IPO owns 9.8% of ONT, the value of its holding reduced by £31.9m in 2023. Given ONT is a major holding, seems to me IPO is almost entirely driven by its share price performance. Look at their respective share price charts as evidence of this.
On a wider scale, IPO’s NAV y/e 2023 [114.8p] was down almost 14% from 2022 [132.9p] which itself was down 20% on 2021 [167p]. In short, IPO’s NAV has had a torrid couple of years, falling 31% during this time. It’s down to management to unlock the supposed true value of these investments or suffer prolonged market negativity. Let’s hope 2024 results reveal NAV has stabilised/increased opposed to further decline.
On to a touchy subject now. I think shareholders have every right to be angry at management re suspension of dividend in favour of share buybacks. Whilst acknowledging the dividend was pretty poor [1.27p per share] I’d still prefer cash in my pocket anytime. I hate it when a company says they are returning cash to shareholders via buybacks. The harsh reality is investors rarely benefit financially. However, I am in favour of buybacks on a large scale, ie. reducing share count by 5-10%. My main gripe here is, and important to note, when IPO announced this value enhancing bonanza they had gross cash of £235m. They could’ve easily subsidised both dividend [c.£13m payout] and share buybacks [£20m] using this cash mountain and still have plenty left over. On this basis I find their decision to suspend the dividend as utterly bizarre.
Which brings me onto IPO’s £20m share buyback programme [commenced 19 Dec 2023]. At the time share price was c.55p giving IPO a market cap of c.£570m. So, for example, if they bought £20m of shares @ 55p average this would reduce shares in circulation by c.3.5%. But given share price has since fallen by 26% [now 40.5p] and buybacks are still ongoing, it’s not inconceivable they could end up reducing overall share count by 4-5% by the time the programme is completed end of 2024, a not inconsiderable amount by any means.
But...the whole point of this exercise was to enhance shareholder value, as envisaged by the board of directors. Therefore it’s somewhat ironic quite the opposite has occurred - shareholder value has been destroyed. During the course of these buybacks IPO’s market cap has collapsed from £570m to £411m today. All of which makes a mockery of this plan to buy back £20m of shares when to date c.£159m [almost 8 times the total buyback sum] has been wiped off market cap.
We’re just past the half way point of 2024 and it’s turning into a very bad year for shareholders whom have [involuntarily] forfeited their dividend, seen share price fall 28%, and without a say in the matter watched the company waste c.£10m [estimated on a pro rata basis] buying back company shares. It’s a common misconception buybacks support a share price. All too often this is not the case, IPO being a prime example.
Time to reinstate the dividend? As per RNS dated 18 December 2023, the board of directors declared, “future cash returns are expected to be in the form of share buybacks when the share price discount to NAV exceeds 20%”.
These so called future cash returns are not monetary in the traditional sense, the reality is not a single penny from these buybacks will end up in shareholders pockets.
As stated earlier, IPO’s last known NAV is 114.8p - using the above 20% discount mechanism implies future buybacks will only stop when share price is 92p or higher. In other words, the share price has to more than double from current price 40.5p. On this basis shareholders will likely not see a dividend for quite some time, possibly another couple years if lucky. I wonder if management will abandon this strategy given they're likely to face a backlash from shareholders at next AGM [unless things drastically improve]. Tell you what though, if the share price doubles from here I won’t give a damn about the dividend as I’ll likely have bailed out c.85p, taken my profits and run for the hills. And I'm sure I won't be the only one.
In closing, I have high hopes for IPO, but patience is required. Management’s plan to reduce the chasm between share price and NAV is clearly not working. The fact the discount has widened considerably during a share buyback will not sit well with shareholders, especially with no dividend to compensate them. It’s abundantly clear the market gives no credence to IPO’s NAV valuation. Is this justifiable or not? Well, it’s down to management to prove the market wrong. If they can successfully do this we’ll be laughing all the way to the bank. In the meantime I’ll be disappointed not to see c.50p in the next 2-3 months. |
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