Company Overview: Qantm Intellectual Property Limited (ASX: QIP) is engaged in the provision of IP services businesses. It also holds a majority shareholding in IP business advisory company, ipervescence Pty Ltd. It offers its clients services including creation, protection, commercialisation, enforcement and management of IP rights. The company operates under four main brands – Davies Collison Cave (DCC), FPA Patent Attorneys (FPA), Cotters Patent and Trade Mark Attorneys (Cotters) and Malaysian company, Advanz Fidelis IP Sdn Bhd (AFIP).
QIP Details
Resilient Business Model & Increased Service Charges Driving Growth: Qantm Intellectual Property Limited (ASX: QIP) provides full-service patents, designs and trademarks practice to its clients. The market capitalisation of the company as on 20 April 2021, stood at ~$141.15 million. The company has a diversified range of client base that includes start-up ventures, SME’s, Fortune 500 companies, public sector research institutions and universities.
QIP has a decent business model in place that has the ability to generate recurring revenue streams, often over periods of at least 20 years.
Despite the impact of the COVID-19 pandemic on the business environment, the company delivered a resilient financial performance, with net revenue increasing by 3.6% to $48.3 million in H1FY21, compared to revenue of $46.6 million in the previous corresponding period. It has witnessed growth in income across main segments of patents, trademarks and legal. Patents grew by 3.2%, trade marks by 3.9% and there was a decent growth of 7.9% in the legal vertical with minimal impact of COVID-19 disruption. The statutory net profit after tax stood at $6 million, reflecting an increase of 36.4% on the pcp. There was also a significant improvement in the operating cash flow by 61.4% to $9.2 million in H1FY21. In view of the improved financials, the Group decided to declare an interim dividend of 4 cents per share during the period.
H1FY21 Financial Performance (Source: Company Reports)
Decent Traction in Services Business: The company has delivered a decent rise of 4% in the service charge revenue to $46.6 million in H1FY21, compared to pcp. It was aided by the acquisition benefit from Cotters and growth across all major products. The bulk of the revenue was generated from Patent Service Charges with a contribution of ~68% during the period. The DCC and FPA brands are well-positioned in the context of the COVID-19 scenario, given volatility across sectors and jurisdictions creates a greater balance. It also reported an uptick in service charges from Trade Mark and Legal business division, with the Australian court system performing well despite the COVID disruption. Both the segment witnessed increased traction in DCC performance.
Services Performance (Source: Company Reports)
Patent Applications: Revenue derived from patent applications typically in the ambit of ~15% to 20% of the company's annual patent Service Charges. The Australian patent applications have been stable during H1FY21, with 58% of the Group total. It witnessed an increase of 6% on H2FY20, with Cotters contributing ~5% of QIP’s Australian patent applications in H1FY21. The company’s Australian patent market share for the first half was at 15%, an increase from 14.4% in the second half of FY20.
Top 10 Shareholders: The top 10 shareholders together form around 29.25% of the total shareholding, while the top 4 constitute the maximum holding. Perpetual Investment Management Limited and ICE Investors Pty., Ltd. are holding a maximum stake in the company at 7.27% and 5.35%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: During H1FY21, the company delivered decent margin performance despite the impact of the pandemic on the general economic environment. It reported an improvement in the EBITDA margin to 22.2% during the period, compared to 20.9% in H1FY20. Net margin also increased to 10.2%, from a level of 7.6% in the prior corresponding period. ROE of the company stood at a decent 8.2% during the period, compared to 6.3% in the prior corresponding period. There was a slight uptick in debt-to-equity ratio to 0.57x. The cash position stood at ~$6.9 million with gearing ratio of ~18.9% as at 31 December 2020.
Growth and Margin Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The company operates in a sector where there is stiff completion among the players, and the firm’s success depends on several factors like price, responsiveness, service delivery, to name a few. The entry of new players or actions by existing peers may have an adverse impact on the company’s performance and profitability. In this regard, the Group should look to deliver a broad range of IP services in an effective manner, and enhance and maintain fruitful client relationships. It is also exposed to regulatory changes as any material changes to the Australian or international legislation, treaties or in general law in relation to the IP services has the potential to impact the Group’s performance.
Outlook: The company is focused on increasing revenues through client retention and adding new clients to its customer base. In this regard, it strives to provide superior IP services to its clients. The firm has been looking to expand its presence in Asia, and establish an office in Singapore for both DCC and FPA. QIP is expected to invest around $8-$10 million over the two to three years’ time frame and anticipate recurring benefits of $4-$6 million per annum. It hopes to see the inflow of benefits from FY22 onwards, with productivity and workplace benefits already starting to flow in.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: As per a recent update, the company’s director Mr Craig Dower has undergone a change in interest in the company and acquired 59,010 fully paid ordinary shares on 24 March 2021. As per ASX, the stock of QIP is trading below its average 52-weeks’ levels of $0.970-$1.250. The stock of QIP gave a positive return of ~1.47% in the past six months and a negative return of ~1.90% in the past one month. On a technical analysis front, the stock of QIP has a support level of ~$0.992 and a resistance level of ~$1.111. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount to its industry median EV/Sales (NTM trading multiple), considering the current market volatility due to the pandemic and stiff completion from peers in the sector. Considering the expected upside in valuation and current trading levels, resilient performance in a difficult period of operations and steady increase in market share of the company, we recommend a ‘Buy’ rating on the stock at the current market price of $1.030, down by 0.962% as on April 20, 2021.
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QIP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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