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IPH Advancing On Acquisition Targets

Australia | Aug 22 2016

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

Patent services and intellectual property business, IPH Ltd, is expanding its global position, with several acquisition targets in sight.

-Impact of America Invest Act to abate in the current half year
-Sale facility for escrowed shares being considered
-Potential of Practice Insight not being reflected in current share price

By Eva Brocklehurst

Patent services and intellectual property (IP) business, IPH Ltd ((IPH))  remains intent on expanding its position in the global marketplace, with several acquisition targets in its sights.

Brokers note there are several probable deals that should provide not only geographical diversification but an entry into markets where IPH’s services are currently limited. The company has indicated it is engaged in sourcing a number of potential acquisitions and hopes to execute on a significant transaction by the end of the year. 

Over 41% of the company’s shares will be released from escrow in November this year with a share sale facility being considered for escrowed principals to aid orderly trading.

IPH did not provide quantitative FY17 guidance with its result but did indicate it expected its Australian and Asian business to grow in line with market trends. FY17 is expected to benefit from the contributions from previous acquisitions as well as the new offices which have opened in Asia.

Earnings were biased towards the first half of FY16, because of a pulling forward of filings caused by the America Invest Act. This seems particularly pronounced in Asia, Bell Potter observes, where  all constant currency growth is estimated to have occurred in the first half. The broker expects the impact will start to abate in the current half year.

The weaker Asian results in FY16 caused a miss to Deutsche Bank’s expectations but the broker notes cash flow conversion remains reasonable and the company is well situated, offering upside potential given significant cash on the balance sheet. Deutsche Bank has a Buy rating and $7.00 target.

Bell Potter believes that with a strong record of generating cash flow and a net cash position on a rising trend, the company is well able to undertake substantial acquisitions. The broker factors in some further expense for FY17 and FY18 in the Practice Insight business, where management is particularly upbeat about the long-term growth potential.

Investment in software development and marketing is expected to mean this business operates at a $3-4m loss in FY17 and Bell Potter is not allowing for any long-term growth as yet. That said, the broker believes the company remains well placed to expand across the Asia Pacific region and into new secondary markets. Bell Potter has a Buy rating and $8.15 target.

Morgans, while also refraining from factoring in long-term growth prospects for Practice Insight, believes potential is not being reflected in the current share price. The broker contends that a positive outcome from this division could have material upside for FY19 and annuity style revenue streams exist if the company can execute on its strategy.

Morgans does not include unannounced acquisitions in forecasts but notes there is $59m in cash on hand and a considerable debt facility. The broker maintains an Add rating with a target of $7.47, and believes a number of catalysts exist to drive growth, including the acquisitions, removal of the escrow overhang and potential FX weakness.

Morgans maintains that IPH not only has a first mover advantage in consolidating a highly fragmented market but should also benefit from its ability to extract significant synergies though its systems and offshore operations.

Macquarie is looking forward to Asian expansion in FY17 and continues to be attracted to the company's business model. The broker's Neutral rating reflects the overhang provided by the escrowed stock.

There are two Buy and one Hold (or equivalent) ratings for IPH on the FNArena database. A consensus target of $71.2 suggests 25% upside.

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