IPH Well Set To Expand

This story features IPH LIMITED. For more info SHARE ANALYSIS: IPH

-Strong expansion outlook for Asia
-More domestic acquisitions in play
-US patent filing into Oz at all-time high
 

By Eva Brocklehurst

Patent attorney IPH Ltd ((IPH)) maintains a strong growth profile in Asia with the volume of patent filings with the company in the first half from that region up 19%.

The company is the number one IP (intellectual property) firm in Singapore and well placed to leverage that country’s role as the IP hub of Asia, brokers contend. In Australia, where the market is mature but fragmented, IPH is in a strong position to consolidate its share. IPH did not provide quantitative earnings guidance but highlighted a robust medium-term outlook.

The company has a track record of strong cash flow, underpinned by low working capital requirements. Bell Potter expects the company’s net cash position will continue to rise and provide significant ammunition to undertake acquisitions.

Nevertheless, the broker now believes the stock price has lifted enough to reflect the benefits of strong growth and downgrades to Hold from Buy. Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, retains a $8.80 target.

Australasia is also growing but the broker observes a more mixed performance. In new business, Callinans, now merged with Fisher Adams Kelly, suffered a major client loss upon being acquired. Local business lost market share, based on patent filings, falling to 20.5% from 22%. Despite the fall in market share the company still achieved a rebound in patent filings in Australia, recording 3.0% growth in the first half.

The results were strong but at the low end of the company's guidance from the AGM, Macquarie observes. Two unexpected factors were blamed for the impact on the results versus guidance, a negative FX impact of $250,000 on US denominated receivables and a timing impact regarding slow collections in December (recovered in January).

The broker believes the Asian performance heralds the greatest long-term growth opportunity. Regional expansion opportunities over the next six months include Thailand and Hong Kong/China. Russia is also flagged as a region of importance strategically.

Domestically, Macquarie understands two firms are under due diligence. The broker is attracted to the business model but, with the stock trading at a 100% premium to the small cap industrials, a Neutral recommendation is maintained. Target is $8.62.

With around 85% of revenue in currencies outside of the Australian dollar, the business remains highly leveraged to a falling currency. IPH does not hedge this currency risk and therefore benefits materially from a weak Australian dollar. The broker observes, as the US economy strengthens, larger corporates are expected to increase their rates of international patent filings. IPH handles around 30% of all US patents entering Australia.

The quality of the result was weak, because of the lower tax rate, Deutsche Bank contends, but the business is still well positioned to meet market expectations. There is also upside earnings risk associated with further accretive acquisitions.

Morgans asserts the underlying quality of the result has been missed by the market. The result may have been at the low end of guidance and disappointing in that regard but but organic growth is strong, both in Australia and Asia. There are also a number of catalysts in the wind. The company has earmarked $108m in further acquisitions to support longer-term earnings.

While the market share in Australia has edged lower, some movement can be attributed to the one-off impact of the loss of the Callinans client. This client, Morgans notes, already used IPH and, as is common practice, wanted to maintain a diversity of patent attorneys.

The broker notes 2015 patent filings in Australia were very strong, up 10.2%. Putting this in context, patent filings usual run just ahead of GDP growth. With this observation, Morgans notes some of the 2015 strength can be attributed to the fact that 2014 was weak, affected by “Raising The Bar” legislation which dragged forward patents into 2013.

Significantly, the broker notes US patent filings into Australia are at all-time highs and the "America Invents Act" is likely to be the main reason for this. Morgans applies a premium to its discounted cash flow (DCF) valuation of 15%, given the company's clear intention to make further acquisitions. Once these are announced and future earnings are factored into estimates the premium will be removed. The broker has an Add rating and $9.60 target.

The consensus target on FNArena's database is $9.39, suggesting 14.8% upside to the last share price. This compares with $9.89 ahead of the results. There are two Buy ratings and one Hold.
 

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