Cube Midcap Report (2 Jan 2020) – Enjoying the ride at Rightmove #IPO #RMV

Cube Midcap Report (2 Jan 2020) – Enjoying the ride at Rightmove #IPO #RMV

Good morning and welcome to 2020 at Cube.Investments!

We’ve already had full-year reviews and annual round-ups by Simon, Joel and Vivek, and I will publish my own final round-up shortly, too.

2020 will (hopefully!) be a big year for this website, as we continue to develop our content offering. Thanks so, so much for your continued interest and support – we couldn’t do it without your feedback, comments and membership.

Anyway, let’s get on to do a Midcap Report for you. There isn’t a huge amount of news flow but we do have announcements by IP Group (IPO) and Rightmove (RMV) (where I have a long position), so I will take a look at them.

IP Group (IPO)

  • Share price: 73.8p (+4%)
  • Market cap: £782 million

Oxford Nanopore completes £109.5 million financing

IP Group is a developer of venture capital businesses, in partnership with mostly British universities. It has a large holding in the gene sequencing company Oxford Nanopore.

Genes in a bottle

The Wooford Equity Income Fund, currently in liquidation, also has (or had) a large holding in Oxford Nanopore. Nanopore promises to enable fast, real-time gene analysis with portable devices.

As reported by Citywire in November, the Woodford Equity Income Fund has been trying to dump its holding in Nanopore, and there were signs that this would be facilitated.

I will speculate that today’s RNS does relate to Woodford’s (partial?) exit from Nanopore:

“…[Nanopore] has raised £29.3 million of new capital and facilitated the secondary sale of £80.2 million of shares, an aggregate investment of £109.5 million.”

Following the deal, IP Group’s percentage stake in IP Group falls to 16.4%, versus 18.2% at December 2018.

Offsetting the reduction in percentage stake, IP Group will record a fair value gain of £12 million from the deal. And it will directly benefit from the sale of £22 million of Nanopore shares.

A concentrated portfolio

Nanopore accounts for a very large amount of IP Group’s total portfolio. So rather than interpreting its sale of shares as a sign that it thinks Nanopore is fully valued, it might be reasonable to think that this is simply good portfolio management. According to the interim results, Nanopore represented an astonishing 24% of IP Group’s total portfolio value.

The fair value of IP Group’s stake was reported as £274 million in these results, dwarfing its other investments. In this context, it is no surprise that IP might want to take a little bit “off the table” from time to time. Nor is it a surprise that it would support a public listing for Nanopore.

Venture capital firms often end up in this situation: 1 or 2 investments do very well, and these oversized positions create an imbalance in the overall portfolio. The next two positions by value in IP’s portfolio are drug developer Istesso (£58 million) and the investment firm Oxford Sciences Innovation (£55.5 million). I note that the value of Istesso is based on “DCF/third party valuation”, which is even less reliable than the value produced by a financing round.

Discount to NAV

IP Group reported a net asset value for June 2019 of 110.6p. Based on today’s share price, it’s trading at a 33% discount to this figure.

But there are many large holdings whose values (from which the Group NAV is calculated) were derived using DCF calculations and third party valuations. And even leaving them to one side, valuations based on recent financing rounds need to be taken with a large grain of salt.

Nanopore is central to the equation. It is growing strongly but if we simply look at the numbers:

  • 2018 revenues were $60.6 million (£46 million)
  • Based on today’s RNS, I conclude that the company is being valued at c. £1.6 billion
  • Therefore, even if revenues doubled again in 2019, it is being valued at a price to sales ratio of 18x

Therefore, I think it’s a stretch to imagine that IP Group is being valued at bargain levels from a quantitative or historical point of view, even if its shares are indeed trading at a discount to official NAV. Its fortunes will depend on the reported valuations proving to be accurate in the fullness of time, particularly in relation to Nanopore.

On the plus side, it reports today that gross cash resources at year end will be “significantly in excess” of the £161 million reported six months ago. That takes some element of downside risk out of the equation, at least in the short-term, as cash adds up to perhaps a quarter of IPO’s market cap.

There may also be a short-term drag on IPO’s shares from its association with Invesco (its largest shareholder, which had a terrible year in 2019) and Woodford, who was a co-investor in a dozen of its investees. When these pressures subside, it could relieve some of the selling pressure on IPO shares, which have approximately halved in price over the last 18 months.

So I can see some arguments for IPO shares to rebound from here, but it’s not enough to tempt me.

Rightmove (RMV)

  • Share price: 638p (+0.7%)
  • Market cap: £5.6 billion

Closed period share repurchase programme

Please note that I have a long position in RMV.

I’ve owned shares in this property portal since November 2018.

If you search the archives, you’ll find that I wrote up my rationale at the time. I put 3% of my portfolio in it, paying 23x forward earnings at an entry price of 445p.

Rightmove is on course to hit those expectations for the year just finished (2019 EPS is set to be in the region of 19.7p) and 2020 expectations are for EPS of 21.6p.

The forward earnings multiple has therefore reduced to 20.6x, versus my entry price (445p/21.6).

The actual earnings multiple in the market has increased considerably, however. According to Stockopedia, it is now trading at 29x forward earnings, with the share price having increased by over 40% since my purchase.

Those who know my investment style will not be surprised to learn that I haven’t bought or sold a share since my initial entry. When things are working well, I prefer to leave them be!

Rightmove hasn’t put a foot wrong and while I await with great interest the latest market share data for 2019, I am satisfied that this is a unique business with some of the best economic characteristics of any quoted UK Plc.

Surging demand for its shares

Buybacks are always a controversial topic among investors and I am very likely to be in a minority when I say that I love them! They do need to be executed well – and that’s the difficult bit.

Some background on Rightmove: its share count was 1.3 billion in 2007, and it has declined nearly every year since then.

With the share price currently near its all-time highs, almost every single share repurchase over the years is currently in profit.

That’s not the right way to look at it, of course. There may have been ways of deploying the company’s earnings which would have been even more profitable than buying back its own shares.

And if the company is currently overvalued (which is certainly possible), then it might end up with egg on its face in future, sitting on capital losses with its more recent repurchases.

But for the time being, at least, the market is giving these repurchases a very big “thumbs up”.

Personally, I get very excited when I see a good business buying back its own shares.

Simple financial maths says that an enterprise with good long-term earnings growth prospects deserves to trade at a very high (>20x, possibly much higher) earnings multiple.

If it is trading at a more modest earnings multiple than this, and it is buying back its own shares, then you have prime conditions for the double whammy of earnings growth and a share count that is materially reducing. This can turbo-charge EPS growth.

To be clear, EPS growth at Rightmove is not rapidly increasing. But if it’s true that its market position is secure, and it can grind out earnings growth of 8%-10% in the medium-term, then the shares do deserve to be at very high rating. Even 30x is not an extreme rating for a company which can do this with a reasonable degree of certainty.

As noted in my previous article, Zoopla got taken out at an earnings multiple of 28x. This could be ZIRP-induced hysteria, or it might be a reasonable reflection of what a successful internet portal is worth.

An update

Today’s RNS states that the company will spend up to £25 million on share repurchases over the next two months, which is its closed period prior to the release of 2019 results. It will buy back up to 3.8 million, or 0.4% of the total.

Small but frequent buybacks are a reasonable alternative to dividends for growing and optimistic businesses, and I wish that more companies would consider them!



That will do it for today – thanks for reading and see you tomorrow!






Wordpress (6)
  • comment-avatar

    Hi Graham,

    Very best wishes for 2020.

  • comment-avatar

    I am sure Rightmove is the one with unbelievable RoCE, isn’t it? I was always afraid of going into this sector because of the new entrant owned by ‘leading’ RE companies but that seems to have turned out a damp squib. So a very nice return in a mid-cap, congrats.

  • comment-avatar

    Hi Graham.  Happy New Year to you and thanks for the great content.  The thing that keeps me awake at night with regards to Rightmove is the fear that one of the FANGS might decide to eat its lunch.  As Jeff Bezos famously remarked – “your margin is my opportunity”.  I wonder what would stop Google for example offering free listings to agents for several years until the entire available property market was listed with them and once people were used to it, they’d start charging the agents listing fees the same as Rightmove currently do.  Does this concern you and can you see any reason not be concerned about this possibility?

    • comment-avatar

      Hi John,

      Good question… it applies not just to RMV but to other online businesses (e.g. GOCO, which I own too).

      The way I see it is: if it’s true that Google can come along and destroy an allegedly super-high-quality business like RMV, then Google is extremely valuable, and Google’s value is probably not reflected in its current share price (which has a lower earnings multiple than RMV).

      I own shares in GOOGL – this should mitigate some of the risk associated with the scenario you outline. I might add some AMZN at some point.



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