IPH Limited

Company Overview: IPH Limited (ASX: IPH) provides IP services with respect to filing, prosecution, management of patents, trademarks and other IP services. It primarily operates in Australia, New Zealand, Asia and few other countries. The company also generates recurring revenue through the development of an autonomous timekeeping software, which is placed under a subscription licence model to its clients. The Group operates under three segments: Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia and Adjacent Businesses (includes the operations of Wisetime).

IPH Details

Increased Patent Activity & Business Integration to Aid Growth: IPH Limited (ASX: IPH) is engaged in the provision of intellectual property services. The market capitalisation of the company, as on 22 February 2021, stood at ~$1.36 billion. IPH reported decent earnings growth and cash generation in 1HFY21, despite the impact of COVID-19 pandemic and currency headwinds. We note that the company recorded $179.8 million revenue in 1HFY21. Underlying EBITDA grew by 2% to $61.7 million in 1HFY21, when compared to the previous corresponding period. There was a significant improvement in the operating cash flow by 39% to $52 million. An improvement in the cash flow has enabled the company to declare an interim dividend of 14 cents per share. It will be paid on 19th March 2021 with ex-date of 23rd February 2021 and record date of 24th February 2021. Hong Kong patent filings increased by 23.2%, while China patent filings improved by 18.1%, compared to the pcp. There was also an improvement in the performance of Xenith with an underlying EBITDA of $15 million and a margin performance of 27%, reflecting a 35% rise in margins. In 1HFY21, net debt stood at ~$55 million with a leverage ratio (Net Debt/EBITDA) of 0.6 times. On 16 October 2020, IPH has announced that AJ Park has settled the acquisition of New Zealand intellectual property firm Baldwins Intellectual Property. IPH has issued 335,016 new shares at an issue price of $7.305 for each share to the sellers. A cash payment of ~$3.8 million was also made to the sellers of Baldwins on the settlement.

The company is poised to take advantage of the synergy benefits out of its acquisitions and is set to further leverage its network in the near future. As markets stabilise and recover, it will look for enhanced operating leverage and improved margins, and will also look for continued growth in WiseTime sales and expansion.

1HFY21 Financial Performance (Source: Company Reports)

FY20 Key Highlights: The company delivered a resilient performance in FY20, despite the impact of the COVID-19 pandemic on the business environment. It reported an increase in core revenue by ~45% to $365.67 million in FY20, from $252.54 million in FY19. IPH’s like-for-like revenue for the Asian IP business increased by ~6% and there was an improvement of 8% in the like-for-like EBITDA, during the same period. There was an improvement in the EBITDA margin from 41.3% in FY19 to 42.2% during FY20, in the Asian business unit. Despite the weaker business conditions in the second half of the year, the company was aided by pre-existing businesses. Statutory NPAT increased by 3% to $54.8 million in FY20. There was an improvement in the operating cash flow of the company to $89.8 million in FY20 compared to $61.6 million in FY19. IPH declared a full-year dividend of 28.5 cents during the year. There was also a significant improvement in the cash position of the company to $82.91 million in FY20 from $35.26 million in FY19.

Revenue & Operating Cash Flow Performance (Source: Company Reports)

Major Global Patent & Trade Mark Filer: The annualised aggregate IPH group patent filings are more than the combined markets of New Zealand and Singapore. The scale and geographic diversification help the company to mitigate any periodic fluctuations in any individual market. The business has been also augmented by the filings from acquired companies, into the IPH network. The Australian patent market grew by 11.3% in 1HFY21, when compared with the pcp.

Patents & Trade Marks-IPH (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 34.44% of the total shareholding, while the top 4 constitute the maximum holding. Invesco Advisers, Inc. and Paradice Investment Management Pty. Ltd.  are holding a maximum stake in the company at 6.15% and 6.10%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company delivered resilient EBITDA performance during 1HFY21 at 32.3%, compared to 31.7% in H1FY20. Net Margin of the company stood at 14.9% during 1HFY21. The company reported current ratio of 2.70x during 1HFY21, and an improvement in the debt-to-equity ratio to 0.39x in 1HFY21 compared to 0.45x in H1FY20. The cash conversion during the period was at 105%, reflecting strong collections despite the volatile business environment. Net debt position was at $55 million, with a repayment of $32.7 million of debt during 1HFY21.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company operates in a highly competitive sector and the business depends on several factors, including price, service, innovation and the ability to provide the customers with a relevant range of IP services. IPH is also exposed to significant regulatory and legal oversight, and the Group’s service offerings are subject to changes in the government legislation. The company is dependent on the expertise of its key personnel for business continuity and any loss of them, can impact the profitability of the business in the short to medium term. IPH needs to invest in its technology platforms on a continuous basis to stay relevant in the industry. The Group is also exposed to foreign currency risks, given a significant part of the revenue, expenditure and cash flows are denominated in USD, Euros and Singapore dollars.

Outlook: The transformation of the legacy Xenith Group with the divestment of the Glasshouse Advisory business and integration of Griffith Hack & Watermark, has resulted in an underlying EBITDA performance of $15 million in 1HFY21, compared to $19.7 million in the last full year of operations. The Griffith Hack & Watermark integration is expected to deliver $2 million in synergies in FY21 and the merged entity delivered an EBITDA margin of 28% during 1HFY21. The company expects to achieve synergy from the Baldwins acquisition and remain on track to provide EBITDA contribution between $2-2.5 million in an eight-and-a-half-month period. The acquisition has expanded AJ Park's IP team and brought greater in-depth of IP expertise.

Valuation Methodology: Price to Earnings Based Market Multiple 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: The company believes that the right-sizing of its businesses has created a more efficient business model. As per ASX, the stock of IPH is trading below its average 52-weeks’ levels of $5.770-$9.640. The stock of IPH gave a negative return of ~14.86% in the past three months and a negative return of ~3.18% in the past one month. On a technical analysis front, the stock of IPH has a support level of ~$5.77 and a resistance level of ~$6.732. We have valued the stock using 5-year average Price to Earnings market multiple to FY21E consensus EPS of $0.340 and have arrived at an indicative target price of lower double-digit growth (in % terms). We presume that the company might trade at some discount to its five years’ average P/E multiple of 24.94x, considering some disruption from COVID-19 pandemic, which might impact filings growth in ANZ region and disruption in the Griffith Hack business due to extended lockdown in Melbourne. Given the backdrop of aforesaid facts, expected upside in valuation, decent financial performance in FY20, resilient performance in 1HFY21 despite the COVID-19 headwinds, reflection of synergy from the acquired businesses, long-term outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the current market price of $6.07, down by 3.498% as on 22 February 2021.

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

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