Member Info for steph

BERENBERG RAISES DRAPER ESPRIT PRICE TARGET TO 700 (690) PENCE - 'BUY'

Nav/share at least 595

Etc etc etc

I would guess

I just topped up a bit

https://www.lse.co.uk/rns/GROW/investment-update-1xezs4cfefhmqgr.html

I like the portfolio. Some bits not sexy but not overhyped, and thus overinvested, either like spaceships. It is the quiet ones that creep up on you.

Trustpilot a typical example of an unsexy business model yet one with great potential.

Facebook was an unsexy business model until it made billions. Who was to know there was big money to be made giving away a communication tool academics had been using for free for some time? Even Microsoft when it was a humble boring subcontractor to IBM tasked with making an operating system (MS Dos) was not recognized as a big firm in the making until it happened. A minor tweak back then in the terms of that subcontract (where IBM retained intellectual property rather than, to save a few dollars, granted it to a small group of programmers) and the whole history of Microsoft would have not happened and IBM might have become a software goliath.

" The fund differs from other pools of capital in a number of key respects. It has a long investment time horizon and can act as a permanent or patient source of long-term capital."

https://www.ifswf.org/member-profiles/ireland-strategic-investment-fund-isif

https://www.lse.co.uk/rns/GROW/holdings-in-company-zo18vyl6weqnzop.html

National Treasury Management Agency ("NTMA") Ireland Strategic Investment Fund ("ISIF") Minister for Finance of Ireland

Utterly fascinating attracting a well known, well run sovereign wealth fund and at 10% of resulting share capital. Was a big one.

I would imagine a very stable investor in for the long term. Same strategy as I have -just a lot more money to invest.

I just get more and more comfortable with this share the more I understand it. Lots of hidden value which is there mainly due to a lack of a wider appreciation of the business model. Hidden gem. Irish sovereign wealth fund which has plenty enough muscle and research capacity to invest directly in Irish and EU private tech firms choosing to use a specialist EU private company stock picker to do so on their behalf is a major vote of confidence in GROW management. For me more so than the traditional funds as they can be more short term and can on occasion sell only because they have made losses elsewhere they need to make up for. Not so for a sovereign wealth fund.

page 28 of annual report 2019 states "the gross profit margin of the core holding is on average approximately 65%."

This is better than industry averages for listed tech companies who are 57% by one study I enclosed previously.

It is also quite fabulous given that the core portfolio is on an average valuation according to IC of 5.0x and 3.0x is used for companies without last round benchmarking.

For the portion of the portfolio that is valued at 3x revenue (sales) if this 65% holds it means we are buying a share of the company that will take less than 5 years to earn in gross profit what we are paying. It is assuredly cheap.

Even for the last round valued bit of the core portfolio with an revenue multiplayer more like 6 it is still very cheap.

The core portfolio have found a solid way of making money. They can continue without share dilution. They will be worth 2 or 3 times as much when they IPO and the SP goes up to industry norms for listed firms.

Lots of hidden value here. These are not struggling start up in the core portfolio. They are making profit above the industry average for tech yet we are not paying even the average tech price. Far from it.

Good luck all. I'm topping up ahead of the interim results.

The core of GROW’s value rests on 3 words in the 2019 annual report on page 17.

They say that the companies they hold “have strong gross margins” .
That is indicative of some fantastic unrealized value. IC notes that the whole portfolio has 5x revenue which means that the portion of the valuations in 2019 annual report that is based on “last round” (405m) is blended with the proportion that is based on revenue multiplier of 3.2 (186m) . This means last round valuations (open market albeit a limited open market) are above 5.0 on average -as you might expect for a fast growing high tech portfolio.

https://www.investopedia.com/terms/g/grossmargin.asp

Now it is a bit of a black box what exactly are those “strong gross margins” and how that compares to product and sector averages. Nor do the annual reports say if “strong grows margins are present in all of GROW’s portfolio or just most.

Given that an annual prospectus can’t be misleading most if not 100% of the GROW held companies must have “strong gross margins” and thus be profitable already on what products or services they sell (if not overall due to funding growth from retained earnings). Given in the sector sunk cots to create the product are fixed (except for upgrades) and each sale at the margin has a very low cost of product or distribution (close to zero for software) any growth of market share is fabulously profitable.

For my money I’m all in. Topped up a bit just minutes ago.

From Jan 2020 Investors chronicle.

"The core portfolio, which accounts for more than two-thirds of Draper’s assets, trades on a trailing price-to-sales ratio of just over five, based on pro-forma revenues of more than $120m. That might seem like a high multiple, but it’s worth noting that these businesses are growing at a clip. "

revenue tends to be very similar to gross sales not profits. Expenses have not been deducted in accounting land when the word "revenue" or in the case of GROW valuations in the 2019 annual report page 95 "revenue-multiples average an average multiple of 3x"

https://preferredreturn.com/blog/public-tech-company-valuation-multiples-2015-2019/

3.0x revenue multiples for valuations is certainly conservative according to these pre covid averages. 5.0x would be fully supportable in the sectors GROW have.

My mistake to confuse revenue with earnings but the conclusion is the same -although not as spectacular an arbitrage opportunity. GROW has undervalued it's portfolio when revenue- multiples are used and not recent capital raising.

Also the sectors like fin tech, software and gaming have few expenses on each unit of additional sales. Thus once a product is created and critical size is achieved they can grow profits exponentially.

I suppose the big boys (and girls) who invest or not in UK/EU pre IPO tech funds are not certain these will be market leaders able to the product through near monopoly market share. Thus the steep discounts for capital injections demanded.

https://preferredreturn.com/blog/public-tech-company-valuation-multiples-2015-2019/

I just don't get it. Seems too good to be true that we value pre ipo private tech companies from the UK and EU at 3.2 earnings.

Even if our valuers never change the 3.2 the companies valued in that way will be rockets as they are not paying dividends and thus 100% of post tax earnings go strait into growing the business. Assuming the business model doe snot change this means 33% growth of NAV/pa. No wonder GROW can legally and sensibly guide us to expect 20% plus year on year earnings growth at the portfolio management level.

I just don't understand why large funds and wealth managers have not piled into the sector raising the price the private pre ipo UK/EU companies can charge.

Maybe it is just such a new sector in this size and configuration and is so stimulated by government and university that the traditional fund allocation is lagging supply and, therefore, fantastic buy in prices can be had. Until IPO a lot of hidden value to be had.

Facebook which had a P/E ratio of 114 at the time of its IPO
https://www.isoscelesfinance.co.uk/value-technology-business/

To my limited knowledge of private tech company valuations it looks like GROW's portfolio is very conservatively valued when they use 3.0 for multiples of earnings rather than recent purchase. Even recent purchases are at a low price in EU compared to USA.

It means we have paid for only 3 years of earnings. That is silly for medium sized growing tech firms.

Just shows the desert of private equity available for private company tech firms in the UK and EU compared to USA. Buyers market so to speak.

there was a shift between March 31 2019 and March 31 2020 final reports on the % of the portfolio valued using last round and earnings multiple approach. It went from 2/3rds last round (409m last round March 31 2019) to 1/3rd (231m last round March 31 2020).

Last round should yield a higher earnings multiple (as it takes into account sector and company specific growth potential in a way that an earnings multiple of 3.2 does not) so the higher the % of last round valuations the better for reported GROW NAV.

Last round can even give a value to companies that are not yet earning but have future promise -such as TESLA was for much of it's life.

I've not calculated the averaged out earrings multiples - which is I suppose how IC came up with 5.0 earnings over valuation. GROW going back has never had 5.0 for shares that have no recent funding rounds to discover value. It has always been 3.0 or 3.2.

Anyhow to make a long accounting story short we now have 3 reasons for a NAV upgrade for the half yearly ending September 30 2020.

1) The percentage of the portfolio may move back to 2/3rds based on last round as opposed to earnings multiples and this will result in a NAV upgrade.
2) While the multiple did not change for GROW holdings using the earnings multiple approach the use of Black Scholes which discounts for high volatility would have depressed the valuations in March 31 2020. Volatility is now normal so there should be some bounce.
3) GROW have a whole set of soft criteria that can deflate valuations in time of stressed markets which can just as quickly be lifted.

Roll on half yearly results.

I've been topping up a bit on every dip below 600. NO deal Brexit dragging all UK shares down but I expect a compromise to be reached. I expect a vaccine roll out shortly.

https://www.thetimes.co.uk/edition/money/this-could-be-the-best-time-in-40-years-to-be-buying-british-shares-3dxx2nr2f

https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

Apparently we use black Scholes for evaluation of underlying holdings when there has been no recent stock bought by a fund to establish fair value. Even recent purchases are a lagging indicator of current value as they are obviously rear view facing especially if the several months due diligence before announcement is included. Also unless there is a bubble forming private funds into private companies tend to get a much better rate than if it were publically traded -especially in EU tech sector which tends to be undercapitalized relative to USA tech sector.

I don't really understand black Scholes but there seems to be a fair weight given to volatility. Thus the more volatile the share and the market the lower the valuation in respect to earning multiples. Thus any valuation made on the 30th of March 2020 would have been severely affected.

Love for a poster who knows more about this stuff to comment.

I'm expecting a revaluation of NAV upwards above the 10% per half year trend line (thus 20% uplift of NAV on our half yearly results due soon) but I can't for the life of me penetrate the formulas needed to make a proper prediction. Need a PhD in accounting g it seems or maybe I'm just not up to it.

https://protect2.fireeye.com/v1/url?k=4ad3cb16-16874b09-4ad3f8d9-ac1f6b63b298-db71370c1da82765&q=1&e=b5cb6d58-fc1e-4b41-abd4-be9418e7f367&u=https%3A%2F%2Fblossomstreetventures.com%2F2020%2F07%2F07%2Ftech-company-revenue-multiples-in-q2%2F

From Jan 2020 IC

"The core portfolio, which accounts for more than two-thirds of Draper’s assets, trades on a trailing price-to-sales ratio of just over five, based on pro-forma revenues of more than $120m. That might seem like a high multiple, but it’s worth noting that these businesses are growing at a clip. "

Research from New York University finance professor Aswath Damodaran suggests the listed software sector – in which Draper’s investments are concentrated – trades at more than double that level.

From GROW annual report page 6 and 42

For core companies which are between 50 m and 1bn (therefore on the large side of SME) the evaluation ratio of revenue to value used in March 31 2020 is only 3.2. This is very low as noted above. The group applies revenue valuation multiples lower than listed companies in same sector and lower growth forecasts for companies impacted by covid (which did not actually impact sector).

https://www.joshuakennon.com/benjamin-graham-intrinsic-value-formula/

26th Nov 2019 7:00 am RNS Interim Results
28th Oct 2019 7:00 am RNS Investment update

Assuming the same for 2020 as we had in 2019 we have a couple of weeks to wait until news that I hope will indicate a healthy NAV upgrade and then broker target upgrades. Then 4 or 5 weeks more for the official results.

I have topped up a bit just below 600. I think the chance of a big dip over the next 2 weeks low and the upside attractive.

Also graham starts with an assumption that even with zero growth a share is worth 8.5x earnings per share.

I don’t think graham imagined trusts but I can’t see why the revaluations upwards that give us earnings are any different in the long run than traditional profits. Money is money no matter how it is earned so long as it is sustainable.

There is a bunch of value formulas but they seem to all produce Results in the same direction,

Big thing they all do is give some weighting to growth which however you look at grow is pretty impressive