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IPH Expands NZ Presence

Small Caps | Oct 12 2017

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

IPH Ltd has acquired New Zealand's AJ Park and brokers expect this can deliver revenue synergies as AJ Park patent cases are referred to its Asian network.

-Potential to upgrade AJ Park margins to IPH level
-Acquisition enhances opportunity to retain client work within IPH network
-Further acquisition opportunities remain, IPH seen supported by dividend yield


By Eva Brocklehurst

Intellectual property and patent firm, IPH Ltd ((IPH)), is substantially increasing its presence in New Zealand with the acquisition of AJ Park, which has around 20% market share.

Brokers believe there is an opportunity to realise material efficiencies in IT, support functions and floor space. This will increase IPH's market share in New Zealand to 26-27%. The purchase price is NZ$66.1m and settlement will be 60% cash and 40% new shares, escrowed for two years.

Canaccord Genuity expects a meaningful contribution to earnings growth in FY18 and FY19 although was a little surprised at first by the acquisition, as the NZ patent sector is likely to share the same GDP-style growth as Australia.

However, the broker acknowledges the transaction is about more than just buying a stream of earnings, as it enhances the company's ability to retain client work within its network in Asia rather than have it referred away to other parties.

The broker also notes the margin opportunity, as the company implements efficient IT systems. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $5.35 target.

Bell Potter, also not one of the eight, also has a Buy rating with a $5.16 target, and believes the acquisition provides a number of strategic benefits as IPH establishes a leading local presence in New Zealand. While including the acquisition in its modelling, the broker does not make allowance for potential synergy benefits at this stage.

Margin Potential

Morgans is very positive about the acquisition and upgrades margin assumptions. There is further scope for margin growth in both Australia and Asia and IPH should be able to significantly lift the margins of AJ Park from the mid-high teens currently being achieved.

The broker agrees the company will be able to use it strong presence in Asia and offer these services to AJ Park clients that are currently using competitors of IPH in Asia. Morgans incorporates the acquisition into forecasts and, after adjusting for currency factors, increases estimates by 3.9%, 5.3% and 7.2% respectively for FY18 FY19 and FY20.

Deutsche Bank is also positive, agreeing there is potential for AJ Park margins to trend towards IPH margins over time via increased automation cost synergies and scale benefits. The broker assumes the business generates 15% operating earnings margins (EBITDA) and achieves 2% revenue growth in FY18.

While there may be scope for additional revenue and cost synergies, Macquarie does not factor this into forecasts. The broker, expecting an acquisition for some time, did envisage it would be in the Chinese region. Hence, IPH is still likely to be seeking these opportunities that could deliver a stronger presence in China and/or open up new regions.

Post this acquisition IPH still has $60m in undrawn bank facilities. The stock is trading at a historical low price/earnings ratio but Macquarie believes it offers a superior earnings profile to the market, supported by an attractive dividend yield. As a result, the broker upgrades to Outperform from Neutral.

AJ Park is a full intellectual property service firm established in 1891 with a substantial local client base servicing multinationals as well as universities and start-up companies. The firm employs 205 people and has offices in Auckland, Wellington in Sydney.

The database shows two Buy ratings and one Hold (Deutsche Bank). Consensus target is $5.66, suggesting 9.7% upside to the last share price. The dividend yield on FY18 and FY19 estimates is 4.8% and 5.4% respectively.

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