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Confidence Grows In IPH

Australia | Aug 20 2018

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

Brokers have become increasingly confident in patent filing business IPH and expect strong growth in both Asia and Australasia in FY19.

-Track record of robust cash flow
-Currency tailwind in FY19
-Potential for sustained upgrade cycle


By Eva Brocklehurst

Patent support business IPH Ltd ((IPH)) turned a corner in its second half, posting improved financial results that are expected to restore confidence in the company's outlook. Australian filings appear to have returned to trend growth and Asian filings are expected to maintain strong momentum. The company grew its patent filings ahead of the Australian and Singapore markets and experienced substantial growth in China, up 44% for FY18.

Underlying FY18 operating earnings (EBITDA) of $74m were up 3.4%. After contracting -3% in the first half underlying earnings did rebound in the second half, up 5%. This was driven by a return to strong organic growth in Asia.

Market share in Singapore continue to hold steady a 24.4%. After contracting -5% in the first half, Australasian revenue returned to positive growth in the second half as well. Market share in Australia strengthen to 23.8%.

The recent acquisition, AJ Park, contributed operating earnings of NZ$6.25. Brokers believe there is upside risk to margins in FY19 for this business through further efficiencies.

Bell Potter highlights a track record of strong cash flow, supported by low working capital and low expenditure requirements. The balance sheet is strong with a small net debt position. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $6.15 target.

While FY18 was challenging, Macquarie suggests the business should now benefit from weaker comparables and favourable currency movements. Acquisitions are also likely to be a growth lever as there are consolidation opportunities among the listed domestic operators.

Commitment To IPH

Morgans notes that over 80% of principals from the Pizzeys and FAKC businesses recommitted to IPH and the company promoted 13 new principles during the year. Filings from Pizzeys tripled in 2017 to 124 cases, and in 2018, 133 cases have already been filed.

In Asia, IPH has retained the number one patent market position in Singapore. Morgans also suspects the America Invents Act has been laid to rest, which should be welcome news to investors, and patent filings should revert to long-term growth rates moving forward. Given the current trading multiple and attractive dividend yield, the broker retains an Add rating on the stock.

Deutsche Bank also hailed the improvement in the second half and believes management has done a good job of integrating its business. AJ Park exceeded the broker's expectations and allayed concerns following a patchy first half. The broker believes IPH is well-placed to leverage a dominant position in an attractive market.

Canaccord Genuity raises FY19 and FY20 revenue forecasts by 3% and 5% respectively, driven by currency benefits and higher assumptions regarding growth rates in Australia.

Currencies are set to be the major tailwind. The broker calculates currency sensitivity at $1.3m in revenue for every $0.01 change in the Australian/US dollar rate. Moreover, a high proportion of that revenue change flows to the earnings (EBITDA) line.

If IPH is now in a sustained upgrade cycle for earnings Canaccord Genuity believes the shares will perform well. The broker, also not one of the eight monitored daily on the database, maintains a Buy rating and increases the target to $6.00 from $5.30.

FNArena's database shows one Buy (Morgans) and two Hold ratings. The consensus target is $5.57, suggesting 0.2% upside to the last share price. Targets range from $5.30 (Deutsche Bank) to $5.92 (Morgans). The dividend yield on FY19 and FY20 forecasts is 4.4% and 4.8% respectively.

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