The following is extract from our complete research this week:
IPH is the holding company for Spruson & Ferguson (S&F), one of the leading Intellectual Property (IP) services firms in the Asia-Pacific region. S&F employs patent and trademarks attorneys and other professionals to assist its clients in IP-related matters, and operates as IP service hubs, offering a one-stop service into 25 countries in Asia Pacific.
The vast majority of patent applications in Australia and Singapore are sourced from offshore markets. Non-resident applicants make up 90% and 88% of applications filed in Australia and Singapore respectively.
We consider IPH to have highly attractive fundamentals: high EBITDA margins, solid earnings growth, high ROE, strong cashflow conversion and a strong balance sheet which should allow further acquisitions. Accordingly, with markets current volatile, any weakness in the share price would present an attractive point.
Key risks include:
i. Sensitivity to Currency Movements. Given the high portion of revenue derived from foreign corporate and associates, the group is highly sensitive to currency movements. A large proportion of the revenue base is generated in currencies other than A$, while the majority of operating costs are derived in A$ (~65%) and the Company does not hedge against his currency risk and will benefit materially from a weak Australian dollar.
ii. Potential changes to the Electronic Patent Cooperation Treaty. If these are implemented, it could negatively impact the group’s national phase entry filing practice. Industry feedback that this reform is likely to be implemented within three years, and expected over a 5-year period.
The Company has only been listed for eight months but we can get a rough idea that price action overall is slightly bullish. This is because the stock rallied $2 in 4 months, but then in the subsequent four months it is only down about 30c from the March high. This tells us that the bulls are still in control. We could be seeing the formation of an ascending triangle here so investors may look to buy at the bottom of the range but the better probability trade is to wait for a break out above $5 to indicate a resumption of the uptrend.