Company Overview: IPH Limited (ASX: IPH) is the leading intellectual property service group which provides filing, prosecution, enforcement and management of patents, designs, trademarks and other IP in Australia, New Zealand, Asia, and other countries. It is engaged in the development and provision of IP data and analytics under the subscription licence model whereby the software is licensed and paid for on a recurring basis. The group is organized into three segments, namely Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Data and Analytics Software.


IPH Details

Continued Double-Digit Growth in Revenue and Earnings: IPH Limited (ASX: IPH) is the leading intellectual property service group, which provides filing, prosecution, enforcement and management of patents, designs, trademarks and other IP in Australia, New Zealand, Asia, and other countries. As on 29 June 2020, the market capitalization of the company stood at ~$1.63 billion. During FY19, revenue of the company increased by 15% and went up to $259.5 million from $226 million in FY18 and EBITDA witnessed an increase of 23% to $85.9 million, up from $70.1 million in FY18. This was mainly due to the impact of organic growth, acquisitions, the sale of Practice Insight businesses and the effect of a weaker Australian dollar compared to the prior year. Increased revenue and EBITDA resulted in a growth of 31% in statutory net profit after tax to $53.1 million, equating to an increase of 29% in diluted earnings per share to 26.7 cents. The Board also declared a final dividend of 13 cents per share, bringing the total dividend per share to 25 cents per share, up by 11% on the prior year. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 29.91% in revenue, reflecting the ability of the company to leverage its extensive network across Asia and implement its strategy to integrate domestic acquisitions and further strengthen its Australian and New Zealand operations. 

During the year, the company also delivered continued double-digit growth in revenue and earnings in the Asian operations and improved margins in the Australian and New Zealand businesses. IPH focused on growth and evolution, enabling broader access to high quality and trusted IP professional services across the Asia-Pacific region. In FY19, IPH Limited had a continued focus on attracting, motivating, and retaining key talent across IPH and made substantial progress in implementing its growth strategy, supporting its future growth and continued to leverage its existing network to grow its Asian business.

During 1H20, IPH reported decent growth across all financial metrics. It also reported a robust balance sheet, reflecting the acquisition of Xenith IP and the adoption of AASB16. The company has delivered a total shareholder return of approximately 370% over the past five years and has expanded its footprint across the Asia-Pacific to provide the clients with access to the most comprehensive group of high quality and trusted specialist IP professional services in the region. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of IPH Limited. Paradice Investment Management Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 6.15%.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Well Management of Costs and Decent Liquidity Levels: Over the span of 2 years, the company has witnessed a slight improvement in its EBITDA margin, which stood at 31.7%, up from 30.6% in 1H18. This indicates that the company is managing its costs well and is able to deliver growth in profitability. In the same time span, net margin and RoE of the company stood at 15.3% and 7.7%, respectively. During 1H20, current ratio of the company stood at 2.45x, up from 1.88x in 1H17. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. During 1H20, assets/equity ratio of the company was 1.73x with debt/equity ratio of 0.45x. 


Key Margins (Source: Refinitiv, Thomson Reuters)

Decent Growth in Revenue and NPAT: During 1H20, the company reported a growth of 46% in underlying revenue to $179.3 million and an increase of 49% in underlying EBITDA to $60.4 million. This reflects continuous improvement from the company’s pre-existing business and a solid performance from the Xenith IP businesses. In the same time span, underlying NPAT went up by 30% to $36.3 million. The filing activity of the company has increased across the key Asian jurisdictions with total patent filing growth of 27.5% on the pcp. IPH Limited maintained a healthy market share in the growing market and leveraged its network for delivering continued growth. In 1H20, the company also reported a robust balance sheet with a gearing ratio of 0.8x. In the same time span, IPH reported strong cash conversion with a net cash flow of $8.7 million, up from $4 million in 1H19. 


Growth Across Financial Metrics (Source: Company Reports)

AJ Park to Acquire Baldwins Intellectual Property: The company has recently announced that its subsidiary, AJ Park, will acquire the Baldwins Intellectual Property for a purchase consideration of ~NZ$7.9 million. The company will settle the transaction with approximately 65% in cash and 35% in new IPH shares. However, this transaction is subject to several conditions, including clearance of the proposed acquisition by the New Zealand Commerce Commission.

Key Risks: IPH conducts its operations in a market that has undergone significant changes. This exposes the group to both opportunities and risks requiring development and communication of a clear strategic vision. IPH is exposed to vigorous competition, based on factors including price, service, innovation, etc. It is also dependent on the talent and experience of its personnel. The loss of any key personnel may have an adverse effect on the company. The company has faced some disruptions as a result of the pandemic and expects reduction in office activity in some IP offices. However, the short-term decline in filings is expected to recover as markets stabilize.

Future Expectations and Growth Opportunities: IPH has a continued focus on Asia to develop the network effect and is concentrating on potential overseas acquisitions in secondary IP markets. It is also focusing on implementing its growth strategy and is prioritizing growth in sales of WiseTime. The company expects to see enhanced performance on Xenith and further earnings accretion over time. IPH Limited is on target to attain synergies of $3.4 million in FY20 from Xenith IP.

The company is not anticipating any significant loss of revenue from the global pandemic. IPH is focusing on maintaining a leading market position in Australia and New Zealand and is aiming for continued expansion in margins. IPH expects the completion of the integration of Watermark into Griffith Hack by July 2020 and expects to generate full-year synergies between $2 million and $2.5 million from FY21.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology:  EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: IPH is creating a more robust and diverse platform to deliver growth in revenue and earnings and increased returns for shareholders. It has shown resilience and is navigating the disruptions from COVID-19 very productively. The company retains a strong financial position with sufficient liquidity and is well-equipped in the event of slow down. As per ASX, the stock of IPH gave a return of 10.63% in the past three months and is inclined towards its 52-weeks’ low price of $6.010. This indicates a decent opportunity for investors to enter the market. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, decent returns in the past three months, resilience in the times of slow down and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $7.36, down by 3.158% on 29 June 2020.

 
IPH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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