Weekly Reports | Jun 06 2025
Two companies flagged for a positive turnaround in FY26, as FY25 draws to a close, and why Xero's management seem to be targeting revenue growth over margins.
-After a couple of challenging years, IPH's earnings are looking up
-Xero's US strategy unfolds as a longer dated investment story
-Post two years of consolidation, EQT is ready to grow earnings
By Danielle Ecuyer
This week's quote comes from market strategists at Wilsons:
"Central banks are mostly in easing, not tightening mode, and we don't see the global economy as headed for recession. This is typically a supportive backdrop when assessing 12 month returns.
"Full US and Australian valuations temper our enthusiasm, but are not enough alone for us to take an overtly negative stance."
Has IPH turned the corner?
IPH Ltd ((IPH)) has been a challenging stock to hold for investors, with the intellectual property legal eagle experiencing multiple issues including a decline in FY24 EPS, challenging conditions in Canada, a valuation multiple contraction, and general pressures on the market generally.
The stock has fallen sub-$5 and is trading more than -50% below the $10 level achieved in late 2023. Brokers like Petra Capital are proposing it's time to Buy the stock, as the growth outlook and earnings momentum look set to improve in FY26 and beyond.
At current levels, the shares are highlighted as offering compelling value at circa 10.6x FY25 earnings, with the June fiscal year set to wind up imminently alongside a FY25/FY26 dividend yield of over 7%.
Petra believes IPH is set to experience organic growth across the three geographic locations it operates in; A&NZ, Asia (including China), and Canada. It would be the first year for organic growth since the company entered Canada in October 2022.
Breaking down the geographies, the analyst points to growth in case transfers for A&NZ of some 600 cases and 2,500 patents. The process enables the transfer of work of intellectual property (IP) matters amongst the network firms, which allows for the alignment of expertise and client needs, improved operational efficiency, and enhanced client relations.
The transfer should facilitate ongoing services such as renewals and price rises, which underwrite longer-term revenue growth.
Filings in Asia have risen 17% FY25 year-to-date inclusive of positive results from Singapore, while a specific strategic focus will be on China, where the company has offices in Beijing and Hong Kong. Petra points to the upside potential from China's technology cycle. This, in turn, is underpinning a substantial uplift in offshore filings from Chinese companies, notably in the telco and AI segments.
Scope for all the geographies to leverage this boom is flagged for not only Asia, but also A&NZ and Canada.
On the latter, the Canadian Intellectual Property Office (CIPO) system backlog is expected to resolve with improved processing, thereby generating revenue. Weak FY25 workflows will offer attractive comps in FY26.
Annual price increases are also expected, along with a full-year contribution and synergy benefits from Bereskin & Parr, which was the fourth acquisition for IPH in Canada, executed in 2024.
Apart from an improving earnings backdrop, attractive valuation and dividend yield, IPH has a "solid" balance sheet with a share buy-back ongoing.
Petra Capital is Buy-rated with an $8 target price against FNArena's daily monitored brokers' consensus target at $6.51, with four Buy-equivalent ratings.
Xero, a longer-dated investment thesis
Jarden's latest update on Xero ((XRO)), while technical in nature which might be off-putting for some investors. Importantly, the update shed some insights about how the analyst envisages management will grow earnings and what strategic emphasis will be placed on the short versus the long term.
At the latest FY25 results, the new CFO Claire Bramley flagged Xero is increasingly assessing financial analytical metrics like the 'Rule of X' while continuing to employ the 'Rule of 40'.
Taking a step back, these terms refer to calculations/performance benchmarks applied to software-as-a-service companies, particularly in the growth stage.
Rule of 40 equals revenue growth as a percentage plus profitability margin (can be operating or EBITDA or cash flow), and if the sum equals or exceeds 40%, the company is usually viewed as managing the trade-off between growth and profitability well.
Rule of X is considered more flexible and is adapted to fit market conditions and/or other factors like sector maturity and capital availability.
It is the same as the Rule of 40 in form, but instead of a fixed 40% benchmark, the X is usually two to three times higher for revenue growth. This implies once a company is cash flow positive, strategically, revenue growth is being prioritised over margin expansion.
In analysing Xero's historical financial data, the analyst notes a higher correlation between multiples empirically achieved with the Rule of X versus the Rule of 40.
When applied to the company's outlook, Jarden proposes earnings estimates will be reduced in the short term and raised in the longer term and accordingly has trimmed FY27FY29 EPS growth by -1.6%, -2.8% and -4.2%, respectively. Long-term EPS estimates have been increased by 9%.
The analysis is flagging Xero will be placing a greater emphasis on investment to drive revenue growth, which will most likely come at the expense of margins, and thus earnings.
Expansion and success in the US are key drivers of the changes, with FY25-FY35 forecast subscriber growth at plus 90k versus plus 50k previously, with North American estimated revenue of NZ$840m, a 20% 10-year compound average growth rate, an upgrade by 51%.
Digging deeper into the US market, the analyst depicts the extent and the challenges for Xero and stresses a support for "heavy investment at the right time".
The US has the largest number of SMEs and the lowest level of cloud penetration of the company's markets (A&NZ and UK), but incumbent Intuit has around 85% market share versus Xero at less than 5%.
The US market is also more complex and nuanced; state variances mean different strategies, regulations, and requirements, which means management has decided to partner with specialists like payments, sales tax, payroll, and bank feeds rather than establishing a proprietary system.
Equally, fewer potential subscribers use accountants; many are what is referred to as self-serve', which will necessitate brand awareness. Currently, Xero has less than 10% unaided awareness versus around 50%-plus in Australia and circa 40% in the UK.
Management has indicated once satisfied with the US product, then investment in brand awareness will rise substantially. Jarden estimates a potential circa $50m-plus lift in annual recurring brand marketing at peak investment from FY26, from its current US cash burn of -US$30m per annum.
Jarden's proposition for an Overweight rating (more than the percentage in the sector index) is based on the longer term prospect, with a high degree of forecasting error to both the upside and downside. The target price of $197 is conservatively based on weighting a base case valuation against the upside/downside scenarios.
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