Small Caps | Oct 16 2017
Intellectual property firm Xenith IP provided weak FY18 guidance, flagging an underperforming transaction, and brokers sharply mark down expectations.
-Main issue stems from integrating and deriving benefits from Griffith Hack
-Xenith IP still likely to expand into Southeast Asia
By Eva Brocklehurst
Xenith IP ((XIP)) has guided to operating earnings (EBITDA) in FY18 of $18-22m, well below broker forecasts which centred around $26m previously, as the company's first quarter performance fell short at both the revenue and earnings line.
The weakness has largely been attributed to the recently-acquired Griffith Hack business, where performance has been affected by the disruption of the transaction and the need to rebalance current capacity against anticipated workflow.
Central to Bell Potter's view of the stock are the attractive operations of all segments, despite the complexity of integrating two business-transforming acquisitions at the same time. Griffith Hack warrants caution, the broker acknowledges, because the need to rebalance current capacity implies an under-utilisation of staff.
Hence, notwithstanding the stock is at the bottom-of-peer group in terms of its PE ratio, Bell Potter downgrades to Hold from Buy, with a price target of $1.22. While integrating recently-acquired businesses in Australia, the broker believes the company will still expand into Southeast Asia, in order to provide a one-stop shop IP service offering in Asia Pacific.
Acknowledging the stock has fallen well short of expectations, Shaw and Partners is not giving up yet and retains a Buy rating with a $2.34 target, reduced from $3.60. The broker contends that management can use the slump in the share price as a catalyst to get on the front foot and focus on integrating operations while deriving synergy benefits from Griffith Hack. If this can be done, the current share price could be a nadir rather than a peak.
Shaw and Partners asserts that the company paid too much for Griffith Hack, and collectively the company's businesses were behind target. The broker assumes Griffith Hack will see a -5% reduction in revenue versus the previous year while the rest of the businesses will grow at 2.5%, not 5%.
The broker also increases the negative currency impact to $2.0m from $1.5m. Given the operating leverage within the business the impact on operating earnings is significant.
Morgans also notes the main issue is the disruption from the Griffith Hack transaction and the need to bed down new practice group structures and reporting lines. The broker had previously flagged the heightened risk around integrating significant transactions and, while the company expects an improvement over the remainder of the year, remains cautious given the ongoing issues and the recent change in CEO.
Morgans has a Hold rating and, in changing to a discounted cash flow from a blended approach & allocating a 20% discount to valuation, reduces the target to $1.10 from $2.03. Future year earnings have also been reduced resulting in reductions to earnings per share of -27% and -28% for FY18 and FY19, respectively.
Xenith IP owns a group which comprises Shelston IP, Griffith Hack, Glasshouse Advisory and Watermark. It provides specialist IP services including identification, registration, management, commercialisation and enforcement of IP rights for a broad range of clients.
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