“Listed law firm” is not a phrase to gladden the heart of an investor, after Slater & Gordon’s 98 per cent plunge in just 12 months – March 2015 to March 2016 – and Shine Corporate’s 80 per cent plunge from grace, which took just a few minutes on January 29 this year.
In both cases the cause was shoddy accounting, and resultant earnings downgrades.
True to their profession, both listed personal injury tort handlers turned in some brilliantly worded explanations – Shine said its income had fallen as a result of "suboptimal fee-earner-to-file" ratios, while Slater & Gordon managed to grow “work in progress” and “percentage of completion” of revenue impressively, without growing cash flow.
It put many an investor off the idea of investing in a law firm, for life.
But IPH Limited (IPH) is different. It is an intellectual property law firm: IPH is the holding company for the Spruson & Ferguson patent and trademark attorneys business, which was established in Sydney in 1887. After amendments to the Australian Patents Act 1990 permitted Australian patent and trademark attorneys to operate in a corporate structure, Spruson & Ferguson became an incorporated entity and a subsidiary of IPH Limited, which listed in November 2014.
IPH has been steadily expanding through acquisition strategy since listing. In 2015 IPH bought long-established Australian IP firms, Fisher Adams Kelly, Callinans and Pizzeys patent and trademark attorneys, and Practice Insight, a specialist IP software developer. In June this year the company added Cullens, the first IP firm ever established in Brisbane. All of these operate under their own names, as does Spruson & Ferguson.
The company now employs more than 420 people, servicing 25 countries, with offices in Australia, China, Malaysia, Singapore, Thailand and Indonesia. Its market share in Australia – as IPH – is 22 per cent, while in Singapore, as Spruson & Ferguson Asia, it is 25 per cent. IPH has 6,000-plus clients, and filed 16,436 patent applications and 4,020 trademark applications in FY16.
In Spruson & Ferguson Asia, the company has one of the leading IP advisory brands in Asia, which generates more than 40 per cent of revenue. There is strong, consistent growth in patent applications in Asia, at 8.1 per cent compound annual growth between 2010 and 2015 – driven by 24 per cent a year compound annual growth in China. In contrast, patent applications in the USA, Europe and Japan have grown at a compound annual growth rate of 3.9 per cent since 2005.
In FY16, its first full year on the market, IPH’s revenue surged by 58 per cent to $140 million, while net profit was up 27 per cent, to $38.8 million. Australian IP revenue represented 65 per cent of revenue on FY16, and 55 per cent of EBITDA (earnings before interest, tax, depreciation and amortisation). Asian IP made up the balance.
Australian IP revenue rose by 74 per cent, and EBITDA by 79 per cent in FY16, while Asian IP lifted both revenue and EBITDA by 27 per cent.
However, adjusted for the addition of new businesses and currency changes, Australian IP revenue was up just 1 per cent in FY16, while EBITDA rose 11 per cent. Adjusted Asian IP revenue increased by 10 per cent, while EBITDA was up 9 per cent.
Currency is a major issue. Earnings come mainly (56 per cent) in US$, as well as A$ (35 per cent), Euro (4 per cent) Singapore dollar (4 per cent) and other currencies (1 per cent). But operating expenses are 74 per cent A$ and 26 per cent Singapore dollar.
However, the best way to view IPH is that it has built a very powerful position in the growing Asian market, with a blue-chip client base. It is one of that rarest of beasts on the Australian stock market, a company poised for sustainable long-term growth in Asia, as a market leader. IPH’s footprint extends into most countries in Asia, and it now has the reach and scale to appeal to international clients doing business in Asia.
Issued at $2.10 a share, IPH shares surged onto the ASX screens at $3.15 – a premium of 48 per cent – and moved fairly smoothly to $9.26 by January this year. Yes, the share market was initially enamoured of Slater & Gordon and Shine Corporate, too; and like them, IPH’s share price chart has turned south, retracing to $5.43, which capitalises IPH at just over $1 billion.
But in IPH’s case the price decline can be seen as a natural result of the company failing to meet consensus expectations in its FY16 result – not a reaction to the accounting and governance concerns that sent Slater & Gordon and Shine Corporate into freefall.
Earnings per share (EPS) for FY16 was 24.3 cents, up 13.9 per cent, but short of consensus expectations. Dividend per share (DPS) was 21 cents, up 55.6 per cent (FY15 saw only an interim dividend paid.) According to the analysts’ consensus collated by FN Arena, analysts expect 25 per cent growth in EPS in FY17, to 27.5 cents, followed by 12 per cent growth to 30.9 cents in FY18. In terms of dividends, analysts expect 23.2 cents this financial year, up 10.5 per cent, rising to 25.7 cents in FY18, a lift of 10.8 per cent. But IPH is only likely to be able to frank its dividends to 50 per cent–66 per cent.
At $5.43, IPH is trading on a consensus FY17 price/earnings (P/E) multiple of 19.7 times earnings, and dividend yield of 4.3 per cent. You could certainly make the case for buying the stock on those numbers, and the analysts that follow IPH agree – their consensus price target on the stock is $7.12, or 31.1 per cent north of the current price.
For a potentially great Asian growth story, that looks pretty alluring.
