IPH Expansion Offers Significant Potential

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

-Asian platform leverage
-Long standing blue chip clients
-Benefit from weaker AUD
 

By Eva Brocklehurst

IPH Ltd ((IPH)) is busy on the acquisition trail, having acquired three businesses since its ASX listing last November. The latest two, Pizzeys Patent and Trade Mark Attorneys, have been bought for $73.3m with a potential earn-out capped at $13.3m.

The acquisitions are attractive, in Bell Potter’s view, as Pizzeys is one of the fastest growing intellectual property (IP) firms in Australia. The acquisition will give IPH a dominant market share of 20%. Pizzeys has recently become the fourth largest filer of patent applications at the Australian Patent Office.

The majority of Pizzeys’ clients are US based. The broker believes there is a significant opportunity to leverage IPH’s Asian platform and broaden the Pizzeys service offering to include that region.

Deutsche Bank also considers the company well placed to capitalise on a leading position in Asia-Pacific IP services. This market has favourable medium-term dynamics with ongoing global investment. The broker is attracted to the company’s cash generating ability and strong growth profile. Moreover, the balance sheet offers more potential for M&A.

The company offers a wide range of services for the protection, enforcement and commercialisation of intellectual property. It has a leading position in the secondary patent application filing market in Australian and Singapore. The long life cycle of IP provides revenue predictability and annuity-style earnings. Longstanding relationships have been forged with blue chip clients.

Deutsche Bank initiates with a Buy rating and $7.85 target. The broker forecasts a 21% 3-year compound growth rate, reflecting low single digit organic growth in Australia and low double digit growth in Asia. This should be bolstered by recent acquisitions. IPH remains a beneficiary of the declining Australian dollar, with 85% of revenue derived in foreign currency.

Risks? The company operates in a highly regulated environment so potential changes are a concern, although there are none on the horizon. Deutsche Bank also cites acquisition pricing and integration risks, particularly given the company grew organically before its IPO and acquired three businesses after listing. IPH is targeting further M&A to support growth.

Bell Potter updates its models for the latest acquisition, believing the transaction is well structured with the use of 50% scrip escrowed for two years. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades growth estimates for FY16 and has a Buy rating and $7.00 target, raised from $6.20.

Morgans observes Pizzeys has even more leverage to a falling Australian dollar than IPH and increases post-acquisition earnings estimates by 6.0% and 8.0% for FY16 and FY17 respectively.

Pizzeys has offices in Canberra and Brisbane and is predominantly dealing with in-bound work from US based IP associates. It has operated for more than 15 years and its acquisition enhances the IPH strategy of consolidating the highly fragmented IP market. Morgans also suspects significant synergies exist in systems and offshore operations.The acquisition follows Fisher Adams Kelly, which was acquired for $26.5m earlier this year.

Despite the strong share price performance since the IPO, Morgans believes the stock has a number of catalysts and is well placed to leverage its superior IT platform and Asian business. Also the push into the cloud should help reduce overheads over the coming year, which will flow straight to the bottom line.

Macquarie also believes Pizzeys can offer more leverage to a depreciating Australian currency and assumes the business operates at margins closer to the Asian business of IPH (50%) as opposed to the domestic business (39%).

After revising FY16 forecasts up by 17% to account for the acquisition and currency assumptions, Macquarie raises its target to $6.20 from $5.00 and retains a Neutral rating. The broker is attracted to the IPH business model but, at a 50% premium to the small cap industrials index, considers the stock fully valued.

FNArena’s database has two Buy ratings (Deutsche Bank and Morgans) and one Hold (Macquarie). The consensus target is $7.04, signalling 3.3% upside to the last share price.
 

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