IPH Ltd (ASX:IPH) is the leading IP services firm in the APAC region with >20% market share in both Australia and Singapore. Since listing, its size, corporate structure and comprehensive suite of services have allowed it to become a natural consolidator in an industry dominated by smaller private partnerships. In theory, it has the enviable defensive growth profile sought by many investors. However, following a disappointing half-year results earlier this month, IPH’s share price has fallen nearly 30%, bringing the yield well above 6%. This is an attractive level of income for a fundamentally strong business with high free cash flow generation, a clean balance sheet and leverage to Asian economic growth. However, earnings have been more volatile than expected over the last several periods and clarity is needed going forward, particularly for income focused investors.
One of the primary sources of the disruption has been a major regulatory change in the US which first came into effect in 2013, pushing earnings forward into FY15/16 and creating a subsequent void in activity in FY17/18. The lingering disruption from this change caught IPH’s management by surprise and as a result, the full effect was not communicated to the market. Once again, the company is now forecasting a return to more normal growth rates both in Australia and Asia. It is unlikely however, that the company trades near its intrinsic value until it proves this is the case, and more generally speaking, that management has visibility over future earnings.
Another feature of IPH’s results is its leverage to FX movements. With a majority US-dollar revenue base against a primarily AUD cost base, IPH benefits materially from a weaker Australian dollar. This is something to bear in mind when timing any potential investment in the stock. It became another feature of the disappointing result when the impact from the rising Aussie dollar over the last 12 months was larger than originally forecast.
Still, at its core, IPH is a market leader in two distinct geographies and in an ideal position to expand into growing markets throughout Asia and beyond. It should grow in line with its underlying markets, bolstering that growth with strategic acquisitions. Given its high free cash flow generation and strong balance sheet, this should facilitate a growing high yield well into the future. This is the ideal scenario but again, it may take some time for the company to prove to investors it is capable of this kind of consistent performance. As a result, we see IPH as an interesting yield-driven opportunity for those investors with an intermediate time horizon.
 
ASX Code: IPH
Security price: $3.46
Industry: Intellectual Property
Forecast 12-month distribution: 24 cents per share
 

Clime Asset Management owns shares in IPH for and on behalf of various mandates for which it acts as investment manager.