IPH Limited: Singapore share slings

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Analyst
Date posted:
20 August 2021, 7:30 AM
Sectors Covered:
Contractors/Developers, Diversified Financials

  • FY21 underlying EBITDA of A$124.3m was down 1%, however slightly ahead of expectations. IPH absorbed a ~A$18m currency headwind within the result.
  • On a LFL basis, EBITDA was +10% on the pcp, driven by margin improvement in both regions (LFL: ANZ revenue down 3%; Asia revenue +3%).
  • IPH’s balance sheet strength (gearing at 0.4x EBITDA) allows for debt funded acquisitions which remain core to the strategy. Offshore expansion appears inevitable and should add to the medium-term growth profile.
  • We retain an Add recommendation. Whilst upside to our valuation is fairly thin, we consider the core earnings base as defensive and acquisitive growth as adding to the ‘network effect’ IPH is building. Earnings sensitivity to currency remains high and USD direction can dictate share price movements on a short-term basis.

Event: Solid FY21 result

IPH Limited’s (ASX:IPH) FY21 underlying financials included: group revenue -1.6% to A$363.5m; EBITDA -1.4% to A$124.3m; and NPATA -1.9% to A$76.2m. Revenue was marginally below expectations, with the ~3% EBITDA beat coming from AUS margin improvement. The FY21 DPS of 29.5cps was up 5.4% on the pcp.

The result absorbed a A$17.7m revenue/EBITDA headwind from adverse currency movements. On a LFL basis (excluding currency, acquisitions, on-off costs), divisional results were: ANZ revenue down 3%, EBITDA +7%; Asia revenue +3%, EBITDA +8%.

IPH ended the period with net debt of A$45m (0.4x EBITDA). Cash flow conversion (to stat EBITDA) was 100%.

Analysis: Some momentum building in Asian regions

Australian market share steady: IPH’s Australian filings (ex-innovation) fell 4.8% vs the pcp (market up 2.6%) but improved through the year (down 8.1% to Oct-20; down 5.7% 1H21). IPH noted that excluding an expected ‘reset’ in the Griffith Hack business, filings were +0.7%.

Singapore market share shows a nice jump: 2H21 Singapore market share of 25.9% was a noticeable increase from ~23% CY18-20. Management noted success from acquired businesses referring a corporate client into the Asian business – validation of the ‘network effect’ IPH is implementing.

Trade mark filings: Australian ‘system’ trade mark filings were up ~24% in FY21, reflecting improved (potentially catch-up) economic activity. Including the Applied Marks acquisition, IPH’s market share is ~24.8% (20% ex Applied, down 130bps).

Acquisitions to feature - at some point: IPH stated they are comfortable with their typical organic EBITDA growth targets (ANZ 3-4% and Asia 7-9%) and are cycling a relatively weak/covid impacted period. Acquisitions in core secondary IP markets and IP adjacencies remain core to the strategy.

IPH is comfortable with 1.5x EBITDA gearing (up to 2x short term for acquisition funding), which equates to ~A$200m of capital capacity (noting ex Xenith, acquisitions have been <A$90m).

Currency sensitivity remains (as always) a big swing factor (1c AUD/USA move is ~A$1.9m EBITDA impact). Average FY21 AUDUSD was 74.72c (spot <72c now).

Small upgrades

We make relatively minor EPS upgrades: FY22/23 ~2.5%; FY24 +4.5%.

Investment view: Add maintained

IPH maintains a defensive core business with solid cash flow generation. The group has a proven track record of consolidation: adding to the strength of the ‘network’ and delivering medium-term growth.

Further acquisitions will feature in time and should add to our base case earnings forecasts. Add maintained.

Price catalysts: Acquisitions

Acquisitions; better-than-expected patent activity and filings; and positive FX movements.

Risks 

Adverse FX movements, loss of major client relationship, lower patent activity, acquisition integration risk, key employee risk and increased competition.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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