Overview: IPH Ltd (“IPH”, “the Company”) is an Australian professional services Company focused on Intellectual Property (“IP”) protection. Services related to patent filings deliver 80% of its revenue, with the balance from trademarks. With a market share of 24%, IPH manages more patents in Australia and Singapore than any other competitor. IPH subsidiaries include Spruson & Ferguson, which has a 130-year operating history in Australia and a 21-year operating record in Asia. The Company employs over 650 people. IPH was listed on the ASX in November 2014. On 11 March 2016 IPH was included in the S&P/ASX 200 index.
Catalysts: IPH has increased underlying revenue and EBITDA for the past five consecutive years. A combination of organic growth and the recent acquisition of AJ Park has the potential to extend the trend. Consolidation of subsidiary practices under the Spruson & Ferguson banner and divestment of non-core software businesses is bringing corporate costs under control. Further cost discipline is possible via the rollout of its autonomous timekeeping platform ‘WiseTime’.
Hurdles: Whilst patent services generate recurring, annuity-style revenue, IPH is nonetheless vulnerable to tightening capital market conditions or changes to Government based R&D incentives that stimulate IP creation. The payout ratio (85%) leaves dividends vulnerable to an earnings contraction. Recent share disposals by the board and management could taint confidence in the Company’s outlook.
Investment View: IPH offers profitable exposure to demand for IP protection. We are attracted to its strong market positions in Australia and Singapore which provide a solid and proven growth platform into broader Asia. The Company’s historical growth trajectory is robust and has the potential to become more salient as recent cost and capital management initiatives reinvigorate the bottom line. Given the industry’s elevated entry barriers, we see the potential for IPH to sustain a premium valuation and grow its dividend and therefore initiate coverage with a ‘buy’ recommendation.
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