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IPH Shares (ASX: IPH) Growing Strong via Acquisitions in Asia

This article was originally published at: MF & Co. Asset Management.

IPH Limited (ASX IPH), founded in 1887, and is an intellectual property company with a number of independent professional businesses.  IPH shares are well positioned to take advantage of the globalisation trend in the legal services industry with growth coming from global acquisitions.

About IPH Shares (ASX IPH)

The company is the first IP services group listed on the Australian Securities Exchange (ASX). In 2018, IPH shares became an ASX 200 company with nearly $AU1 billion in market capitalisation.

The company provides a wide range of IP and data services related to the provision of filling, prosecution, enforcement and management of patents. The services support a diverse client base of Fortune Global 500 companies, public sector research organisations, foreign associates and local clients. IPH Limited services a multidisciplinary team including 450 employees and operates across several countries, including  Australia, New Zealand, the Pacific Islands and Asia.

Increasing Presence of IPH Abroad Through Acquisition

IPH Limited has been focused on increasing their presence in the Asian market through the acquisition of a predominantly trademark businesses in Beijing and Hong Kong. The company has also opened new offices in Thailand and Indonesia within the past 18 months. The company’s acquisition strategy continues to be aimed at increasing business in high growth Asian regions to add value to the business and create potential to generate a solid financial return for shareholders.

As a result, trademark filings in IPH have increased by 38% compared to that of the previous year along with the opening of the Spruson & Ferguson in Melbourne. Furthermore, the trademark of Spruson & Ferguson (Asia) has grown by 50% in 2017 compared to 2016.

Both new and existing clients have responded well to the expansion of the company in the Asian market, as the number of cases transferred is significant in the past 12 months. The new corporate structure provides opportunity for IPH to renew and ensure leadership in IP services, which lays a strong foundation for future growth.

However,  there are risks to ensure that targeted companies can properly integrate into IPH and whether the target company matches IPH’s strategic objectives, values and culture.. IPH works through an extensive due diligence process, which covers relevant matters relating to the target company. Legal contracts are required to be completed for every company acquisition, including appropriate indemnities and warranties and employment arrangement with key individuals. What’s more, most acquisitions of IPH are paid by its shares, which are required to be escrowed for up to 2 years.

Increasing Globalisation Trend in The Legal Services Industry

Even though the competition in the legal service industry is substantial, there are some areas that have not been exploited completely.

A high growth rate in Asia-Pacific and a huge overseas market give local companies an opportunity to expand their operations across the territory. IPH’s visionary insight assists them to hold market share in the intellectual patent field.

Due to a large number of local law firms offering services mainly in the domestic space globalisation is not high in the legal service industry. IPH noticed the high-speed growth in the Asia region and captured this trend to expand operations in the Asian market via acquisition in Hong Kong, Beijing, Thailand and Indonesia.

In 2017, revenue generated from Asian IP business grew by 14%, up to $68.6 million in total; $9.9 million of this sum came from the acquisition of Ella Cheong Ltd in Hong Kong. From the perspective of the CEO, IPH still views Asia as an attractive growth centre in the coming years.

Increasing external professional service providers, such as large accounting firms and government departments, are developing their in-house legal services capacities, which is attractive to large corporate clients.

These developments may remove the margin that traditionally belongs to legal service firms. Additionally, heavily restricted regulations exist in the legal service industry. Law firms have to abide by the regulations in their jurisdiction, which limits the local firms to operate interstate.

In recent years, another two legal service firms have become competitors in IPH’s market, Xenith IP Group (ASX: XIP)and Qantm Intellectual Property Limited (ASX: QIP), which have both been listed on the ASX and have major acquisition strategies in their immediate business plans. This might affect IPH’s share price and take away the profit margin in the Asia region.

Substantial Growth in IPH Shares Earnings

Earnings per share show the percentage of a company’s profit related to numbers of outstanding shares. Investors looking for a steady source of income by estimating the probability of an increase in dividend can do this through EPS ratio.

The EPS of ASX IPH shares steadily increased during the past three years as EPS in 2017 was 22.33, compared to 21.7 in 2016 and 19.48 in 2015. The high EPS ratio of IPH also indicates that it can pay a significant dividend for shareholders.

IPH’s dividend yield is currently 6.33% and could see dividends increase with EPS growth.

Continued Level of Profitability in ASX IPH Shares

IPH’s profit margin has not changed since IPH become listed, even though it experienced a slight decline.

IPH still have quite a high-profit margin of 24.46% in 2017, compared with competitors Xenith IP Group at  10.6% and Qantm Intellectual Property Limited with 1.31%. Furthermore, IPH shares have a comparatively high ROE ratio of 18.58% with no borrowing carried out in 2017, in contrast with Xenith IP Group ROE of 5.97% and QANTM Intellectual Property Limited ROE of 1.84%, which is a good indicator that ASX IPH shares might bear lower risks.

As for P/B ratio, IPH shares with 3.84% is relative higher than Xenith IP Group and Qantm Intellectual, 1.22% and 2.38% respectively. Even though it has high P/B ratio compared to their competitors, its growth strategy into Asia can potentially justify this higher valuation.

EPS 2017 2016 2015
IPH Limited (ASX IPH) 22.33 21.7 19.48
Xenith IP Group (ASX XIP) 6.3 20.59 0
QANTM Intellectual Property (ASX QIP) 5.4 N/A N/A

IPH’s PE ratio is also slightly elevated compared to its peers, which can again, be justified by its higher growth potential into Asia.

Potential Growth Expected in Future Years for IPH

Overall, ASX IPH shares performed well throughout  the past few years, and it has great opportunities in the future.

By continuing its acquisition strategy of other companies in different areas and embracing the globalisation trend in the legal services industry their performance should continue to do well.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.



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