Security price:
FY1 value: $5.62
Industry: Intellectual Property Services
FY1 forecast distribution: 25.0 cents per share
IPH Ltd (ASX:IPH) is the leading IP services firm in the APAC region with 20-25% market share in both Australia and Singapore. 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.
Operating out of two regional hubs in Sydney and Singapore, IPH continues to dominate the Australian market while growing rapidly into Asia. IPH may not strike you as a typical income stock given its premium multiple and rapid expansion, but consider that its core business is mature and stable with a predictable growth outlook. It is highly cash generative with no debt and an ~85% payout ratio. This translates to an attractive expected yield of around 5% (c. 70% franked) over the next 12 months, expected to grow in line with profits over time.
Over the last 12 months, IPH’s share price has been in flux as the market anticipates the release of shares (owned by former and current management) from escrow. The final parcel of shares, worth around 8% of the total shares on issue, was released on 17 February 2017. This should clear a short-term hurdle for the share price, and allow the stock to trade better in line with its intrinsic value.
Going forward, IPH intends to expand its Asian footprint following its first Chinese acquisition late last year. Given the fragmented and relatively inefficient nature of these markets, there is a clear opportunity for the group to build a proactive position, in advance of expected market evolution to more sophisticated (and more profitable) structures. In general, the demand for IP services in these markets is growing at a much higher rate than IPH’s existing core markets. Additionally, its budding data and analytics division further strengthens its medium-term outlook and could form a significant and distinct avenue of growth in the future.
One source of risk that should be flagged however, is IPH’s material currency exposure. With the majority of its revenues billed in US dollars and the majority of its cost base in Aussie dollars, it is inherently leveraged to currency movements. Management’s current expectation for FY17 is an average AUD/USD rate of 0.762 with the group favouring a weaker Aussie dollar.
Assuming business conditions remain unchanged, intrinsic value is estimated at $5.62, 12 months out. Given the groups’ capacity and propensity to acquire new businesses, it is likely this value will rise as new acquisitions are announced.
Damen Kloeckner is an Analyst at Clime Investment Management. Clime Investment Management holds shares in IPH.