IPH Limited

Company Overview: IPH Limited (ASX: IPH) is the leading intellectual property service group that 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 organised into three segments, namely Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Data and Analytics Software.

IPH Details

Growth in Financial Metrics amid Challenging Market Conditions: IPH Limited (ASX: IPH) is the leading intellectual property service group that provides filing, prosecution, enforcement and management of patents, designs, trademarks and other IP in Australia, New Zealand, Asia, and other countries. As on 31 August 2020, the market capitalisation of the company stood at ~$1.47 billion. During FY19, IPH continued to deliver double-digit growth in revenue and earnings in Asian operations and improved margins in the Australian and New Zealand businesses. Improvement in financial performance reflects 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 FY20, revenue of the company went up by 43% to $370.1 million. EBITDA also posted a healthy growth of 32% to $113.2 million. This was driven by the impact of organic growth, and the acquisition of Xenith IP. In the same time span, the group achieved a statutory NPAT of $54.8 million, reflecting an increase of 3% on the prior year’s result of $53.1 million. During the year, the group generated positive cash flows from operating activities of $89.8 million. The company has maintained its number one patent market share position for the year at 36.5%. The decent financial and operational performance enabled the Board to declare a final dividend of 15 cents per share, taking the full year dividend to 28.5 cents per share, an increase of 14% on the previous year.

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 ~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.

FY20 Financial Highlights (Source: Company Reports)

Growth in Revenue and Healthy Balance Sheet: During 1H20, IPH Limited maintained a healthy share in the growing market and leveraged its network for delivering continued growth. During the half-year, 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. In 1H20, the company also reported a healthy balance sheet with a gearing ratio of 0.8x. In the same time span, IPH reported decent cash conversion with a net cash flow of $8.7 million, up from $4 million in 1H19.

Growth across Financial Metrics (Source: Company Reports)

FY20 Segment Performance: The Group is organised into three segments namely, Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Adjacent Businesses. During FY20, underlying revenue in the Australia and New Zealand IP segment increased by 62% to $277.7 million and underlying EBITDA increased by 55% to $95.6 million. The Asian IP segment achieved sales revenue growth of 10% to $102.7 million. The Group acquired Glasshouse Advisory as part of its acquisition of Xenith IP.

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)

Key Margins: During FY20, the company reported a net margin of 15%, and EBITDA margin of the company stood at 20.3%. During FY20, Return on Equity (ROE) of the company was 15.5%, and current ratio stood at 3.01x. In the same time span, asset to equity ratio of the company was 1.75x, and debt/equity ratio stood at 0.48x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The company has faced some disruptions due to the pandemic and has seen a larger reduction in office activity. However, the short-term decline in filings is expected to recover as markets stabilise. 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. IPH conducts its operations in a market that has undergone significant changes. This exposes the group with both opportunities and risks requiring the development and communication of a clear strategic vision. The company is also exposed to risks related to strategic planning and implementation, technology disruption, foreign exchange risk, risks from the integration of acquired businesses, etc.

Outlook: The company is harnessing the potential for growth with the acquisition of Xenith IP and has realised synergies of $3.5 million for FY20. It is also on track to achieve synergies of ~$2 million from FY21. The company is prioritising to leverage the expanded group and focus on Asia to develop network effect. It is emphasising on margin expansion and realise operational efficiencies across the group. The company is realising the benefits of its operating model synergies and consolidated corporate services and retains a healthy balance sheet with no near-term refinancing commitments. The company might face some further disruptions from COVID-19, however, it seems to be well-positioned to manage in an uncertain environment.

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 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. The company retains a healthy financial position with sufficient liquidity and is well-equipped in the event of slow down. IPH is a significant global patent and trademark filer and is mitigating the periodic fluctuations in filings in certain markets with the help of scale and geographic diversification. As per ASX, the stock of IPH is inclined towards its 52-week low level of $6.010, proffering a decent opportunity. On the technical analysis front, the stock of IPH has support level of ~$6.28 and resistance level at~$8.07. We have valued the stock using the EV/sales multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the valuation, its market position, attractive trading levels, resilience in the times of slowdown and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $6.860, down by 0.146% on 31 August 2020.

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

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