IPH Limited

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

Investment Summary

• During FY19, IPH Limited delivered strong results with continued double-digit growth in revenue and earnings, owing to its acquisitive growth from Xenith, changes in foreign currency, and organic growth in business.
• 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.
• The company has delivered a total shareholder return of approximately 370% over the past 5 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.
• The company also expects the completion of integration of Watermark integration into Griffith Hack by 2H FY20 and expects to generate full year synergies of between $2 million and $2.5 million.
• The stock is trading at attractive levels and thus, offers a good opportunity for accumulation.

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 4 May 2020, the market capitalization of the company stood at ~$1.54 billion. IPH marked another successful year in FY19 with the acquisition of Xenith IP Group. During the year, the company delivered continued double-digit growth in revenue and earnings in Asian operations and improved margins in the Australian and New Zealand businesses. IPH has always focused on growth and evolution, enabling broader access to high quality and trusted IP professional services across the Asia-Pacific region. 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 also the effect of a weaker Australian dollar compared to the prior year. As a result of increased revenue and EBITDA, Statutory Net Profit After Tax (NPAT) increased by 31% to $53.1 million, equating to an increase in diluted earnings per share of 29% to 26.7 cents. The decent financial and operational performance of the company enabled the Board to declare 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.

The company has recently declared its interim results for the period ending 31 December 2019 wherein it reported decent growth across all financial metrics. IPH Limited 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. 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.

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 6.17%.

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 convert its revenue into profits. In the same time span, net margin of the company stood at 15.3% and Return on Equity of the company was 7.7%, in line with ROE of 1H18. 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: Company Reports)

Decent Growth in Revenue and NPAT: The company has released its interim results for the period ending 31 December 2019 wherein it 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, which were acquired by IPH. The significant increase in revenue and EBITDA resulted in underlying NPAT to rise by 30% to $36.3 million. In the same time span, the company witnessed improved margins with an increase in the number of cases transferred from new and existing clients. The filing activity of the company has increased across the key Asian jurisdictions with total patent filing growth of 27.5% on pcp basis. 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 0.8. 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.

The company had acquired all the shares of Xenith and marked a significant milestone in the continued implementation of its strategy to be the leading IP group in secondary IP markets and adjacent areas of IP. During the half-year, Xenith contributed revenue of $48.8 million and Underlying EBITDA of $9.5 million. The increased contribution has been achieved through corporate cost synergy of $1.3 million and margin improvement of $0.5 million.  

Growth Across Financial Metrics (Source: Company Reports)

Future Expectations and Growth Opportunities: IPH has a continued focus on Asia to develop the network effect and is also 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 has seen an enhanced performance from the Xenith businesses compared to the pcp and expects to see 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 also monitoring the impact of the outbreak of novel coronavirus in various countries and stated that there might be some disruption to the business, but it doesn’t anticipate any significant loss of revenue. IPH is focusing on maintaining a leading market position in Australia and New Zealand and is aiming for continued expansion in margins. The company also expects the completion of the integration of Watermark integration into Griffith Hack by July 2020 and expects to generate full-year synergies of between $2 million and $2.5 million from the integration of Watermark into Griffith Hack. The company is continuing to create a more robust and diverse platform to deliver growth in revenue and earnings and increased returns for shareholders.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology:  EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

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

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

Stock Recommendation: As per ASX, the stock of IPH is trading close to its 52-weeks’ low level of $6.010, proffering a decent opportunity for the investors to enter the market. IPH continued to leverage its existing network to grow Asian business and has added further value to the group. The company achieved double-digit growth across its key financial metrics and reported strong performance in the first half of FY20. Considering the attractive trading levels, high shareholder returns, decent financial performance and positive outlook in the long run, we have valued the stock using EV/Sales multiple based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $7.320, up by 1.667% on 04 May 2020.

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