IPH Limited: Borders open, time to travel

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
18 February 2022, 10:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • IPH Limited (ASX:IPH) reported LFL EBITDA growth of 5% (to A$64.8m) on LFL revenue growth of +2.8% on pcp. Divisional LFL EBITDA growth was Australia +5% and Asia +10%.
  • The underlying result (EBITDA +11% to A$68.3m) was assisted by a net currency benefit of A$2.7m and A$0.8m acquisition contribution.
  • Domestic filings market share slipped (290bps to 33.9%) on integration disruption and a decline in filings from a large client. Implied Singapore market share also fell from heightened 2H21 levels (2H21 25.9%; 1H122 implied 22.6%).
  • 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.
  • Whilst upside to our valuation is thin, we consider the core earnings base as relatively defensive, with likely upside from acquisitions in time. A successful offshore acquisition is central to our retained Add recommendation.

1H22: 5% like-for-like EBITDA growth

IPH’s 1H22 adjusted (excluding currency, acquisitions, one-off costs) financials included: group revenue +3% to A$184.8m; and EBITDA +5% to A$64.8m. Including favourable currency and acquisition contribution, group revenue was +6.5% to A$191.4m; EBITDA +11% to A$68.3m; and NPATA +15% to A$43.2m. Overall, the result beat consensus expectations, however this was on currency.

On an adjusted/LFL basis, divisional results were: ANZ revenue up 1%, EBITDA +5%; Asia revenue +9%, and EBITDA +10%. Below-the-line expenses and one-offs totaled A$13.4m, including ~A$2m for acquisition-related expenses.

The Australian division posted 5% LFL growth, after being flat for the first 4 months. This was despite filings being weak for the final two months.

The interim dividend of 14.5cps was 3.6% on the pcp (14cps) and IPH ended with A$41m net debt (~0.4x EBITDA). Gross cash flow was solid (typical 1H >100% conversion), up 3.8% to A$65m. Avg 1H22 AUD/USD was 72.6c (spot <72c now).

Analysis: market shares softer over 1H22

Australia market share declines: 1H22 Australian filings were up 1.4% on pcp. Filings were +8.7% for the 4 months to Oct-21, implying a much weaker Nov/Dec. IPH noted the Spruson/Shelston merger impacted, as well as lower activity from S&F’s largest client. Excluding the large client impact, filings would have been +4.3%. Australian market share fell to 33.9% in 1H22 (from 36.8% pcp). Management expects the disruption to be temporary.

Singapore filings share increased CY21 from CY20, although implied 1H22 market share dropped to 22.6%. IPH noted 4Q21 market filings fell 1.2% on a significant decline from one of the largest filers in the market (also a client of IPH). Asia filings (other jurisdictions) were up 16.2%, with continued strong growth in China (16.9%).

IPH reaffirmed expected integration synergies, with A$1-1.25m of EBITDA synergies expected in FY22 (an incremental A$0.8m in 2H22; annualised synergies of A$2-2.5m).

No firm statements were made on acquisitions, however international acquisitions remain a focus.

Forecast and valuation update

Upgrades are driven by a slightly better-than-expected underlying 1H22 result and currency benefit. FY22-24 EBITDA is upgraded by ~3-5%. Currency remains the largest swing factor to near-term forecasts.

Investment view

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.

Price catalysts and risks

Acquisitions, better-than-expected patent activity and filings, and favourable FX.

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

Find out more

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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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