Company Overview: IPH Limited (ASX: IPH) provides services related to the provision of filing, prosecution, enforcement as well as management of patents, designs, trademarks in Australia, New Zealand, Asia and other countries. The company operates in three segments - Intellectual Property Services in Australia & New Zealand, Intellectual Property Services in Asia and Adjacent Businesses (includes Wisetime & Glasshouse Advisory). 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.

IPH Details

Resilient Performance Driven by Synergies from Acquisition: IPH Limited (ASX: IPH) is an intellectual property (IP) services group in the Asia-Pacific region and offers a range of IP services and products. The market capitalisation of the company as on 04 January 2021, stood at ~$1.39 billion. The company acquired Xenith IP Group on 15 August 2019, and successfully integrated it into IPH’s business with a net cost and revenue synergies of $3.5 million. Under this integration, the firms of Watermark and Griffith were brought together to create one firm operating under the Griffith Hack brand.

During FY20, the company delivered a decent performance. There was an increase of 62% in revenues from the Australian & New Zealand IP business to $277.65 million in FY20, from $171.65 million in FY19. Revenues from the Asian IP business grew by 10% to $102.71 million from $93.46 million, in the same period. There was a moderation in the filing activity across key Asian jurisdictions in H2FY20, when compared to H2FY19. However, the company has maintained its number one market share position in Singapore as on 3 August 2020. There were like-for-like revenue and EBITDA growth of 10% and 14%, respectively, in the China and Hong Kong business. The total revenues of the Group increased by 43% to $370.1 million in FY20, driven by the synergy achieved from the acquisition of Xenith and the impact of organic growth. Underlying EBITDA increased by 41% to $126.03 million, from $89.69 million in the prior corresponding period.

IPH continues to invest in its time-keeping software application, WiseTime. There is an increase in the work from home trend, owing to the closure of offices due to the spread of COVID-19 and the company expects to benefit from this development and has seen an increased interest in its WiseTime application.

FY20 Financial Performance (Source: Company Reports)

AJ Park’s Acquisition of Baldwins: In a recent announcement, IPH’s subsidiary AJ Park has settled the acquisition of New Zealand’s IP firm- Baldwins Intellectual Property. IPH issued 335,016 new shares at a price of $7.305 each, and a cash payment of ~$3.8 million to the sellers of Baldwins on settlement. Baldwins is a reputed IP firm, with four partners and other IP professional staff working from Auckland and Wellington offices. IPH believes this acquisition will further enhance its market position in New Zealand.

Resilient Performance Amidst COVID-19 led Pandemic: Despite the difficult business environment due to the outbreak of COVID-19, IPH delivered like-for-like underlying EBITDA growth in the first four months of FY21, when compared to the pcp. The Asian business has delivered a decent performance, with Singapore registering robust patent filings. CY20 YTD data indicates a 4.7% growth in IPH Singapore filings and a 4% growth in total Singapore patent market filings, when compared with CY19 YTD period. The company has also seen a recovery in its China practice, with 21.6 % patent filings growth for the first four months to FY21, when compared with the prior corresponding period.

IPH experienced a marginal slow down in patent filing in its Australia and New Zealand businesses. It saw a decline of 8.1% in the Group’s filings in the first four months of FY21, compared to the prior period. However, the like-for-like underlying EBITDA has increased compared to pcp. This reflects the synergy acquired with the acquisition of Xenith IP and the integration of Watermark into the Griffith Hack business.

During FY20, revenue from its Australia & New Zealand businesses, which contributes the major share of total revenues, was at $277.65 million. Revenues from the Asia businesses were at $102.71 million in the same period.

FY20 Geography Wise Revenue (Source: Company Reports)

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 35.04% of the total shareholding. Invesco Advisers, Inc is the largest shareholder in the company, with a percentage holding of 6.15%. Paradice Investment Management Pty. Ltd. holds the second maximum interest in the company at 6.10%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During FY20, the margins were somewhat impacted due to the disruption brought in by the COVID-19 pandemic. There was a slight reduction in EBITDA margins to 32.4% in FY20, from 33.1% in FY19. Net margin declined to 15% from 21%, in the same period. IPH reported a ROE of 15.5% in FY20. There was also a decrease in the current ratio to 3.01x in FY20, from 3.86x in FY19. Leverage of the Group increased from 1.46x in FY19, to 1.75x in FY20. The net debt stood at $68.3 million as on 30 June 2020. There was an improvement in the cash cycle to 80 days in FY20, from 89.1 days in FY19.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The company operates in a competitive sector and there is scope for market conditions to change over time, which may impact the business’ performance. IPH is also exposed to regulatory and legal oversight. Its service offerings are subject to changes in government legislation, regulation and practices. IPH depends on the knowledge and know-how of its key employees, and any loss or unavailability of them can impact its business performance in the short to medium term. The company is dependent on its system and IT applications for the smooth functioning of the business and should conduct reviews on a regular basis to prevent any threat of cyber-attack. A substantial proportion of IPH revenues are generated in the US, Euros and Singapore dollars, and as such, the company is also exposed to foreign currency risk. The company also depends on acquisitions of other IP businesses for business expansion, and any adverse impact on achieving synergy with the acquired entity might lead to disruption in the financial performance of IPH.

Outlook: Despite the challenging business environment, the company has been able to expand its business through its planned acquisitions. AJ Park completed the acquisition of Baldwins on 16 October 2020. It believes there will be synergy benefit from this purchase, and expects 8.5-month EBITDA contribution to be between $2-2.5 million, in FY21. The company has delivered a resilient performance in the Australia/New Zealand business, reflecting the synergy attained with the acquisition of Xenith IP, and the integration of Watermark into the Griffith Hack business. It also expects to achieve corporate cost and synergies of $2.5 million in FY21, from this integration. IPH will continue to look to enhance its revenue stream with further synergy utilisation from the Xenith business. As per the company, its strategic priorities will include to maintain its leading position in Australia, New Zealand and Singapore, and look for opportunities to expand in other jurisdictions.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Based Market Multiple Valuation (Illustrative)

P/E Based Market Multiple Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: IPH has been delivering decent financial performance, despite the challenging business conditions owing to the COVID-19 pandemic. It reported a significant rise in revenues and EBITDA during FY20, compared to the previous corresponding year. As per ASX, the stock of IPH is trading below its average 52-weeks’ levels of $6.010-$10.340, proffering a decent opportunity for the investors to enter the stock. The stock of IPH gave a negative return of 8.36% in the past three months and a negative return of 5.6% in the last one month. On a technical analysis front, the stock of IPH has a support level of ~$6.238 and a resistance level of ~$7.293. We have valued the stock based on a 5-Year average P/E market multiple of 27.06x to FY21E consensus earnings per share of $0.30 and arrived at an indicative target price of low double-digit upside (in % terms). Considering the current trading levels, decent financial performance, key acquisitions and revenue visibility, we recommend a ‘Buy’ rating on the stock at the current market price of $6.57, up by 2.177% as on 4 January 2021.

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

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