Company Overview: IPH Limited (ASX: IPH) is a leading intellectual property (IP) services group, offering a wide range of IP services and products. The company is present in the Asia-Pacific region with operations in Australia, New Zealand, Papua New Guinea, the Pacific Islands and Asia. The team comprising of around 900 professionals, provides service to a client base of Fortune Global 500 companies and other multinationals. IPH is the holding company of AJ Park, Griffith Hack, Pizzeys, Practice Insight, Shelston IP and Spruson & Ferguson. Through the IPH network, the group provides services for the protection, commercialisation, enforcement, and management of all forms of intellectual property, including patents, trademarks, and designs.

IPH Details

Acquisitions Aiding to Greater Market Share: IPH Limited (ASX: IPH) provides intellectual property (IP) professional services across the Asia-Pacific region. It charges a fee to its clients for the provision of IP services, including of filing, prosecution, enforcement and management of patents, designs and trademarks in Australia, New Zealand, Asia, and other countries. As on 30 November 2020, the market capitalization of the company stood at ~$1.49 billion. The company expanded its portfolio in 2019, with the acquisition of Xenith IP Group. This was the largest acquisition in the IP firm’s history and bolstered investors’ confidence in its vision to be the leading IP group in secondary IP markets. IPH has successfully integrated Xenith IP into its operations, with the delivery of net cost and revenue synergies of $3.5 million.

The company had shown resilience and delivered superior financial returns, in spite of COVID-19 virus crippling the world economy in the second half of FY20. Revenue increased by 44% to $369.6 million in FY20, from $256.6 million in FY19. Revenue from Australian & New Zealand IP increased by 62% in the same period. Revenue was primarily driven by the impact of organic growth and the acquisition & integration of Xenith IP. The positive impact of a weaker Australian Dollar had also aided the growth in revenue. Statutory EBITDA went up to $113.2 million in FY20 from $85.856 million in FY19. Statutory net profit increased by 3% in FY20 to $54.8 million from $53.1 million in FY19.

FY20 Financial Highlights (Source: Company Reports)

IPH continues to maintain a decent balance sheet, with cash & cash equivalents of $82.9 million as of FY20. However, borrowings have increased to $151.2 million during the year, but it has a conservative gearing ratio (Net Debt/ Underlying EBITDA) of 0.6 times. As of FY20, net debt stood at $68.3 million, with no refinancing commitments until February 2022. IPH continues to generate positive cash flows with an operating cash flow of $89.8 million in FY20. During the year, net cash flow of the company stood at $48.6 million, reflecting an increase from $11.9 million in FY19. Despite the COVID-19 headwinds, IPH declared a dividend of 28.5 cents per share in FY20, up by 14% on the prior year.

FY20 Cash Flow Statement (Source: Company Reports)

Due to the merger of Xenith, there were some disruption to its IP businesses during the second half of the year. Like-for-like revenue for the previous Xenith IP business declined by 5% due to the merger impact, coupled with reduced client filings. But the achievement of cost synergies due to the merger, resulted in an increase of 7% in like-for-like EBITDA. The business model of the company allows it to generate recurring revenue streams throughout all stages of the IP lifecycle. With the successful integration of Xenith, the Group will further strengthen its portfolio with value acquisitions.

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of IPH Limited.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins:  During FY20, EBITDA margins stood at 32.4% and net margin was 15%. There was a decrease in ROE to 15.55% in FY20, from 19.2% in FY19. This can be attributed to the increased need of equity to finance the acquisition of Xenith IP. The cash cycle has improved from 89.1 days in FY19 to 80 days in FY20. Most of the operating ratios have decreased marginally in FY20, in comparison to FY19. This can be attributed to the COVID-19 impact on business as well as due to the merger activities carried out during the year. Going forward, the return ratios are expected to improve.

Key Margins (Source: Refinitiv, Thomson Reuters)

Increasing Footprint: IPH remains the patent market leader in Australia with combined group patent market share of 36.5% as of June 2020. The company has maintained its number one patent market share of 23.3% in Singapore. Through its acquisition of Xenith IP, the group expects financial benefits of approximately $2 million per annum from FY21. The Group’s New Zealand business, AJ Park, has further strengthened its presence in New Zealand, with the acquisition of IP firm, Baldwin’s. WiseTime, the time-keeping technology, achieved revenue growth in FY20 from a growing customer base.

Key Investment Risks: IPH’s substantial proportion of revenue, cash flows, and business operations are denominated in USD, Euros, and Singapore dollars. Hence, it is exposed to significant foreign currency fluctuation risk. The firm applies suitable hedging currency facilities to mitigate the risks on this aspect. It is also exposed to professional liability and uninsured risks as the line of business give rise to potential liability or negligence by client or third-party claims.

IPH’s line of business also allows scope for existing market conditions to change over time, reflecting the inherent risks and exposes the company to stiff competition. It is also exposed to significant legal and regulatory oversight. Services offerings are dependent on changes to government legislation, proposals to streamline multi-jurisdictional patent filing, and examination processes. The company experienced some slowdown in workflow due to the disruptions brought in by COVID-19 and the economic uncertainty. It had to temporarily close some of its offices in various jurisdictions, thus impacting business.

Future Expectations and Outlook: IPH is a leading player in the professional IP services domain and the management is likely to maintain its market share in Australia, New Zealand, and Singapore and seek to expand in other secondary market jurisdictions. In FY21, the company will try to harness the potential of its recent acquisition-Xenith and attain synergies across the operating levels. Acquisition of Baldwin provides IPH to further increase its market share in New Zealand. It will also look for organic growth in Asia by leveraging its already established network.

FY20 was challenging considering the whole business environment, but IPH continued to deliver shareholders’ value with decent dividend returns. This shows the commitment of the company towards its shareholders. The recent acquisition of Xenith is likely to provide cushion to its financials and the company is expected to attain synergies and better operating leverage in years to come.

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: The company has stable revenue streams and decent returns over the years. As per ASX, the stock of IPH is trading close to its 52-weeks’ low levels of $6.01, proffering a decent opportunity for the investors for accumulation. The stock of IPH gave a return of 0.87% in the past three months and a return of 5.32% in the last one month. On a technical analysis front, the stock of IPH has a support level of ~$5.997 and a resistance level of ~$8.147. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in % terms). Considering the current trading levels, increasing footprint, modest long-term outlook, and expected synergies from the acquisition of Xenith, we recommend a ‘Buy’ rating on the stock at the current market price of $6.92 on 30 November 2020.

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

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