IPH Moves Closer To Domestic Market Goal

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

-Consolidates Melbourne presence
-High earnings margins, returns
-Well placed to grow Asian share
 

By Eva Brocklehurst

IPH Ltd ((IPH)) continues to expand, with its latest acquisition being the Melbourne-based Callinans patent and trade market assets for $11.5m. The acquisition will be funded by scrip and cash and, while accretion is not material to FY16 earnings, it signals to brokers the company's ability to consolidate the sector.

Callinans will be merged with the Fisher Adams Kelly acquisition and the entity will be renamed Fisher Adams Kelly Callinans. The combined business will have a strong presence in Brisbane and Melbourne and lines up with the company's Spruson & Ferguson office, based in Sydney, to provide a strong presence on the east coast.

Brokers consider IPH is well placed to grow in the region, given its dominant intellectual property services based in Singapore and Australia and an ability to leverage multinational clients.

Deutsche Bank believes the acquisition of Callinans is a minor positive as it increases the Australian patent market share while expanding the domestic footprint and broadening the client base. The broker assumes a transaction earnings multiple of around five times, implying 2.2% earnings accretion in FY17. Deutsche Bank notes there is significant further capacity on the balance sheet and retains a Buy rating on valuation.

The new merged entity is the right decision, in Morgans' view, as it provides a stronger focus on corporate clients and consolidates the Melbourne business. The company's goal of 25% domestic market share is now in view, with the share estimated at 21% on the back of the latest addition.

The acquisition price includes potential earn-out payments of $6m, based on a proportion of FY16 earnings from key clients compared with FY15, as well as assumptions around employee entitlements. This will be funded by $5.5m in up-front consideration and the first $4m earn-out will be paid by 50% scrip and 50% cash. Scrip components are escrowed for two years.

For Morgans, IPH ticks most investment boxes, with high earnings margins, solid earnings growth, high returns on equity and strong cash flow conversion. Morgans has moved its rating back to Hold from Add on the back of the acquisition but would become a buyer again on share price weakness.

Macquarie, yet to update for the latest acquisition, also has a Neutral rating. FNArena's database has one Buy and two Hold ratings. Target is $7.13 which suggests 3.6% upside to the last share price. Targets range from $6.20 (Macquarie) to $8.00 (Deutsche Bank).

Bell Potter, not one of thee eight stockbrokers monitored daily on the FNArena database, believes the business is high quality and situated in a structurally growing industry. The broker has a Buy rating and raises its target to $7.90 from $7.00.

There should be front-end synergies with the company's Asian platform as approximately 70% of Callinans' client base is offshore. The broker take the opportunity to strengthen medium and longer term growth estimates in the belief that IPH will be able to grow market share in Asia more quickly than previously assumed. The net effect is an increase in FY16 and FY17 estimates by 1.9% and 3.2% respectively, with more material increases beyond.

See also, IPH Expansion Offers Significant Potential on September 24 2015.
 

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