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 organized into three segments, namely Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Data and Analytics Software.

IPH Details

Growth across Most Financial Metrics in 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 12 October 2020, the market capitalization of the company stood at ~$1.53 billion. IPH reported a resilient business and maintained a decent pipeline of work because of previous filings. However, the company saw some disruption due to the pandemic and thus witnessed a slowdown in instructions from clients. IPH continued to manage its cost and has accessed over $1 million in Government Support grants from China, Hong Kong SAR, and Singapore.

During FY20, revenue of the company went up by 43% to $370.1 million, and EBITDA of the company went up by 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.

IPH reported decent growth across all financial metrics and reported a healthy 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)

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 6.11%.

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 32.4%. In the same time span, Return on Equity of the company was 15.5%, and current ratio stood at 3.01x. During the year, Assets/Equity ratio of the company was 1.75x, and Debt/Equity Ratio of the company stood at 0.48x.

Key Margins (Source: Refinitiv, Thomson Reuters)

FY20 Segment Performance: The Group is organized into three segments namely, Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Adjacent Businesses. During FY20, the group has maintained its number one patent market share position in Australia at 36.5% and reported an underlying revenue in the Australia and New Zealand IP segment of $277.7 million, reflecting an increase of 62% year over year. In the same time span, underlying EBITDA increased by 55% to $95.6 million. The Asian IP segment achieved sales revenue growth of 10% to $102.7 million and maintained a decent position in market with a like for like growth of 10% in revenue in Hong Kong and China. With an increasing trend of working from home, IPH benefitted from the investment in WiseTime. The Group acquired Glasshouse Advisory as part of its acquisition of Xenith IP.

Patent Filings in Asia (Source: Company Reports)

AJ Park cleared to acquire Baldwins Intellectual Property: The company announced that New Zealand Commerce Commission has granted clearance for the proposed acquisition of Baldwins Intellectual Property by AJ Park (Subsidiary of IPH). The transaction is likely to be completed on 15 October 2020.

Outlook: The company is harnessing the potential for growth with the acquisition of Xenith IP and has realized synergies of $3.5 million for FY20. It is also on track to achieve synergies of ~$2 million from FY21. The company is prioritizing to leverage the expanded group and focus on Asia to develop network effect. It is emphasizing on margin expansion and realize operational efficiencies across the group. The company is realizing 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, but it seems to be well-positioned to manage its operations in an uncertain environment.

IPH is focused on growth and evolution, enabling broader access to high quality and trusted IP professional services across the Asia-Pacific region. The company had a continued emphasis on attracting, motivating, and retaining key talent and made substantial progress in implementing its growth strategy, supporting its future development, and continued to leverage its existing network to grow its Asian business. The company will hold its AGM on 19 November 2020.

Key Risks: The company has faced some disruptions because of the pandemic and has seen a larger reduction in office activity. However, the short-term decline in filings is expected to recover as markets stabilize. 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.

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 very productively. 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-weeks’ low level of $6.010, proffering a decent opportunity for the investors to enter the market. On a technical front, the stock of IPH has a support level of ~$6.518 and a resistance level of ~$8.201. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, resilience in the times of slow down and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $7.21, up by 1.406% on 12 October 2020.

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

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