Australia | Sep 08 2020
Despite the potential for softness to continue into FY21, IPH Ltd has a resilient patent filing business with a broad geographic reach which should allow it to bounce back.
-Cash generating business with a sustainable dividend
-Flow of patent filings, new work meant redundancies were avoided
-Synergies with Xenith IP should be a positive contributor to growth
By Eva Brocklehurst
Patent filing business IPH Ltd ((IPH)) is intent on delivering synergies from its acquisition of Xenith IP along with scouting for secondary IP market acquisitions offshore. That said, there was no specific guidance provided at the FY20 results and weakness related to the pandemic and US dollar softness is expected to continue into FY21.
Canaccord Genuity notes the shares spiked ahead of the results and then failed to maintain momentum, despite strong cash conversion evident in the second half.
Revenue was less than the broker expected, mostly attributable to the performance of Xenith IP. The company pointed to a slowing of workflow because of disruptions among some clients and the general economic uncertainties, as well as temporary closures of some patent offices.
However as Canaccord Genuity again points out, there does not appear to be a threat of the GFC-style decline in filings amid indicators such as patent lapses. US filings remains within normal ranges.
The broker considers IPH a quality business which is attractively priced and retains a Buy rating with a $9.50 target. The final dividend of $0.15 was 10% ahead of FY19. Macquarie, with an Outperform rating and $8.50 target, lauds the relative resilience of the company's business model, and the potential for acquired earnings signals it is an attractive, defensive stock.
In Australia organic revenue growth fell -5% and the market share of the combined IPH group fell to 36.5% from 38.3%. Still, as Goldman Sachs notes, IPH was cycling very strong comparables. The contributing factors, such as the pandemic and the merger of Xenith IP are temporary, Morgans agrees and market filings should bounce back, as 2019 filings in primary markets increased over the 3% in 2019.
Morgans also likes the defensive characteristics of IPH, although expects the first half in FY21 will be "depressed" and a more normal environment will only return in FY22. Patient investors should be rewarded, nonetheless, and the broker does not rule out acquisitions in existing or new secondary market regions. Morgans has an Add rating with an $8.64 target.
The company received no assistance in Australia or New Zealand as a result of the government stimulus but around $1.1m was received across Singapore, China and Hong Kong. Filing activity across the main Asian jurisdictions eased in the second half of FY20 compared to the strong prior comparable period. Yet Asia remains strong with underlying revenue up 9.9% amid benefits from currency and organic growth of 6%.
The flow on effect of prior filings and the level of new work enabled the company to avoid making any redundancies or stand down staff and Bell Potter notes the pre-existing business achieved a more resilient result compared with recent acquisitions.
The company has been prudent, Macquarie observes, in managing its business during the pandemic as it controls discretionary expenditure and decisions regarding remuneration increases have been delayed.
Griffith Hack was the main drag on the Australasian business in FY20, contributing to the overall revenue decline of -5% with a -6% decline. Griffith Hack, which includes Watermark, was most affected by the pandemic, the company points out, as well as integration activity.
Still, AJ Park and Griffith Hack are now top ten referral clients of the IPH China business. The company has referred to this as the network effect and Morgans believes this will be the main driver of earnings going forward.
Bell Potter reduces Australasian FY21 forecasts because of the recent softness, particularly in Griffith Hack, but makes no material change to subsequent years. The broker believes the company's quality client base, diverse geography and flexible business should underpin earnings and retains a Buy rating and $8.65 target.
Goldman Sachs also cuts estimates over FY21 and FY22, taking into account the likely FX headwinds that are estimated could take off -$7m from operating earnings (EBITDA) in FY21 based on current assumptions. Still, the annualisation of the merger with Xenith IP and synergies should be a positive contributor to growth.
The broker is yet to incorporate Baldwins into its numbers and anticipates more bolt-on acquisitions will continue to be the core strategy of the business. Goldman Sachs likes the stock because it has a high market share in the relatively stable Australasian and Singapore markets while being exposed to high growth in Southeast Asia and China.
Moreover, the business generates cash and has a sustainable dividend pay-out. The broker calculates a prospective 23.5% return on capital employed in FY21. Goldman Sachs has a Buy rating and $8.90 target and does not believe the current share price fully reflects the attributes of the business.
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