IPH Limited (IPH) Buy at the bottom

Transcription

1 29 March 2017 Analyst Sam Haddad Authorisation TS Lim IPH Limited (IPH) Buy at the bottom Recommendation Buy (unchanged) Price $4.76 Target (12 months) $7.90 (unchanged) Expected Return Capital growth 65.9% Dividend yield 5.0% Total expected return 70.9% Company Data & Ratios Enterprise value $857m Market cap $915m Issued capital 192.3m Free float ~82% Avg. daily val. (52wk) $5.6m 12 month price range $ $7.27 GICS sector Price Performance Professional Services (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) We believe IPH s share price has bottomed & currently represents an attractive, timely opportunity to Buy. We believe the negative issues are behind and believe a number of positive drivers will emerge that will support the share price, as discussed in this note. We believe the negatives are behind and priced in Key negative factors that have weighed on IPH s share price and now behind include: Share overhang removed, with ~30m of escrowed shares sold. AIA impact behind. Growth in IPH s Asian business was weak in CY16 due to a strong CY15. In CY15, the pull-forward of filings due to AIA saw IPH s Singapore office grow at double the market pace (up ~11% on CY14 vs market at ~5%). Loss of a large client of Callinans/Pizzeys following the acquisition of Callinans. While one-off in nature & not material to IPH, this weighed on investor sentiment. The reallocation of investment funds across three listed IP firms. Delays in securing key acquisitions and the upfront due-diligence costs incurred. and believe a number of positives now lie ahead Key positive factors that we see lie ahead and will be supportive to the share price are: The resumption of solid growth in IPH Asia. We are forecasting high single-digit organic growth in 2HFY17 as the comparable period normalises post AIA. We see potential upside risk to IPH s FY17 EBITDA $72m-$74m guidance range, with the resumption of growth in Asia the key swing factor (as per Figure 2). Integration/other synergies yet to be realised. While integration is well underway, no material cost-out benefit has to date been realised. We expect this to begin to flow in 2HFY18/FY19, although have not yet allowed for this in our forecasts. The previously flagged key acquisition prospect in Asia remains active. Timing on this remains difficult to assess, although a resolution by end-cy17 is possible. Earnings changes & Investment view Retain Buy, PT $7.90 There is no material change to our forecasts & our PT is unchanged at $7.90. IPH is a high quality business across many facets. We believe IPH s derating s well overdone and believe a number of positives will emerge that will support a recovery. Buy rating. Absolute Price $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 Mar Jul 15 Nov IPH Mar 16 SOURCE: IRESS BELL POTTER SECURITIES LIMITED ACN AFSL Jul 16 Nov 16 S&P 300 Rebased Earnings Forecast Jun Year end 2016a 2017e 2018e 2019e Sales (A$m) EBITDA (A$m) NPAT (reported) (A$m) NPAT (underlying) (A$m) EPS underlying (cps) EPS underlying growth (%) 34.0% 7.2% 12.3% 10.2% PER (on underlying EPS) (x) EV/EBITDA (x) Dividend ( ps) Yield (%) 4.4% 5.0% 5.6% 6.2% Franking (%) 65% 74% 65% 65% SOURCE: BELL POTTER SECURITIES ESTIMATES DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 7 THAT FORM PART OF IT. Page 1

2 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Negatives behind, positives lie ahead IPH has experienced a significant PE derating Since June 2016, IPH (along with its peers) has experienced a material derating in PE ratio valuation from what was a comfortable premium vs the market (defined by the published Bloomberg PE for the ASX 200/All Ordinaries indices), to now at around par. Figure 1 illustrates IPH s rolling 1-year forward consensus PE over time. Figure 1 PE valuation for IPH & other IP Groups vs market PE (first year forward estimates) IPH QIP XIP ASX 200 All Ordinaries Index SOURCE: BLOOMBERG As detailed in our sector note dated 14 March 2017, we attributed the de-rating in IPH and, more broadly, the IP sector, to the following factors: The market discovering the fair value for a new ASX sector that has no offshore listed equivalent; This path of discovery initially shifted the sector (which initially only included IPH) to stretched valuation levels, justifying a de-rating at that time off these highs. Note that we downgraded our rating on IPH from Buy to Hold in Feb 2016 on valuation grounds. We have since reinstated our Buy rating following a ~30% retreat in IPH s share price; The re-allocation of investment funds from initially just IPH to two IP groups (once XIP listed) and now three IP groups (once QIP listed); A slowdown in EPS growth rate, primarily for IPH, on the back of reducing accretive/ arbitrage benefits from acquisitions (off a growing base), the reduction in FX tailwinds, as well as IPH s slower growth rate in Asia throughout CY16 while cycling impacts of the America Invests Act (AIA); The loss of a large client of Callinans/Pizzeys following IPH s acquisition of Callinans. While one-off in nature and not material to IPH, this did weigh on investor sentiment; The overhang of IPH shares in the lead-up to escrow period expiry in Nov 2016; and Delays in securing key acquisitions and the upfront due-diligence costs incurred. We believe the negatives are behind and believe a number of positives now lie ahead that will support IPH s share price We believe the negatives in the stock are behind and believe a number of positive drivers will emerge that will support the share price, as follows: Share overhang removed, with ~30m of escrowed shares sold. IPH management s shareholding has reduced from almost 40% to ~18%, increasing market liquidity. Page 2

3 The impact of AIA is behind. Growth in IPH s Asian business was weak in CY16 due to a strong CY15. In CY15, the pull-forward of filings due to AIA saw IPH s Singapore office grow at double the market pace (up ~11% on CY14 vs market at ~5%). We are forecasting a resumption of solid growth (high single-digit growth) in 2HFY17 as the comparable period normalises post AIA. We see potential upside risk to IPH s FY17 EBITDA $72m-$74m guidance range, with the resumption of growth in Asia the key swing factor, as illustrated in Figure 2. Figure 2 EBITDA bridge analysis FY16 to FY17 (BPe and assuming FX has no material impact) $M Negative growth in 1H17 partially offset by an expected improved result in 2H17. We believe there is scope for this to surprise on the upside. BPe is $73.9m (top end of IPH's guidance range) Company FY17 EBITDA guidance range is $72m to $74m FY16 EBITDA S&F ANZ growth FAKC + full New earnings New earnings, period Pizzeys from Cullens Ella Cheong S&F Asia growth Data Services Investment Increased corporate costs FY17e EBITDA, BPe SOURCE: BELL POTTER SECURITIES ESTIMATES Integration synergies & other cost efficiencies are yet to be realised. While integration is well underway, no material cost-out benefit has to date been realised. We expect this to begin to flow in 2HFY18/FY19, although have not yet allowed for this in our forecasts. The previously flagged key acquisition prospect in Asia remains active. Timing on this remains difficult to assess, although a resolution by end-cy17 is possible. We believe IPH is well oversold, valuation premium is justified Figure 3 shows a snapshot of IPH s current valuation vs peers/market (i.e. the exiting data points in the earlier Figure 1 correspond with the FY17 PE ratios tabulated in Figure 3). Figure 3 PE ratios and EV/EBITDA multiples for IPH vs its peers and market Peer EV P/E 1 EV/EBITDA EPS Growth (%) 1 Div Yield (%) (A$m) FY16 FY17e FY18e FY19e FY16 FY17e FY18e FY19e FY16 FY17e FY18e FY19e FY16 FY17e FY18e FY19e IPH Limited (IPH) % 7.7% 11.8% 9.9% 4.4% 4.9% 5.5% 6.1% IPH premium/discount to average 20% 20% 20% 21% 21% 21% IPH premium/discount to ASX 200 index 5% -3% -7% QANTM IP Limited (QIP) % 11.9% 9.3% 4.7% 6.4% 6.9% QIP premium/discount to average -5% -1% -1% 0% -1% 0% QIP premium/discount to ASX 200 index -13% -19% -22% Xenith IP Group Limited (XIP) % 13.4% 12.8% 3.0% 4.0% 6.5% 7.6% XIP premium/discount to average -16% -19% -19% -21% -20% -21% XIP premium/discount to ASX 200 index -29% -35% -39% Average % 12.3% 10.7% 4.5% 6.1% 6.9% ASX 200 Index IP sector ave. premium/discount to ASX % -19% -23% 1 Price earnings ratio on NPATA (x); and EPS growth on NPATA (%) 2 QIP FY17e Divident Yield is based on pariod from 30 August 2016 to 30 June 2017 (and therefore is not an annualised yield). SOURCE: SOURCE: COMPANY DATA AND BLOOMBERG CONSENSUS ESTIMATES As illustrated, based on Bloomberg consensus forecasts, IPH is currently trading at roughly par with market. As detailed in our sector note dated 14 March 2017, we believe the IP sector average PE should trade at a premium to the market PE. In addition, we believe it s justified for IPH to trade at a premium to QIP and XIP given IPH s greater scale and Page 3

4 geographic coverage including market leadership positions in Singapore and ANZ and an established presence in key SEA markets that is now broadening into inbound Greater China. This in turn provides automatic scale and leverage exposure to the high growth Asian market (~40% of IPH s earnings) including more immediate scope for market share gains across multiple Asian markets. Page 4

5 IPH Limited Company Description IPH Limited (IPH) wholly owns Spruson & Ferguson, Pizzeys, Fisher Adams Kelly Callinans, Cullens & Practice Insight. IPH is the leading Intellectual Protection (IP) services group in the Asia-Pacific region employing ~475 staff, with specialist services spanning the protection, commercialisation, enforcement and management of most types of IP. Key practice areas include: Patents & Designs (Patent work being IPH s major rev contributor); Trade Marks, Domain & Business Names ; & Legal (commercial legal advice/ip litigation). Investment Strategy We rate IPH Buy with a price target of $7.90. IPH is strategically positioned as the leading one-stop gateway for Asia-Pacific. In Asia we view IPH s growth prospects as two-fold: 1) growth of the market itself; and 2) market share gains. As the number one IP firm in Singapore, IPH is well placed to leverage off Singapore s emerging role as the IP hub of Asia. We believe this, plus the opportunity to leverage off its clients, positions IPH on strong footing to take share. In Australia, while mature, the market is fragmented. We believe IPH is in solid position to acquire. There is also opportunity for IPH to expand into target secondary markets beyond the Asia-Pacific region and ultimately become the global firm for secondary markets. This long-term vision is embedded in IPH s mission statement. Valuation Our 12 month valuation is $7.90 based on DCF. Major assumptions are a WACC of 10% & a terminal growth rate of 4%. We also include a 10% high acquisition propensity premium. Risk to Investment Thesis Key downside risks to our valuation include (but are not limited to): Regulatory reform risk: Amendments to current legislation or the introduction of new legislation may cause material changes in patent or trademark flow volumes. Competition risk: This will impact margins and may impinge on IPH s market share Foreign exchange risk: IPH is exposed to both transactional & translational currency risk and does not hedge against this. Any adverse FX movements or volatility (esp, vs the $A) could have an adverse effect on IPH s financial performance and position. Acquisition risks: Poor due diligence or unsuccessful integration will impact earnings. Macro-economic risks: Adverse economic conditions may cause IPH s clients to defer /cancel IP spend or exert pricing pressure. Activity levels in key industry sectors: IPH s client base is spread across numerous sectors. Adverse developments in key sectors may impact demand for IPH s services. Personnel: The departure of any key personnel would likely have an adverse effect. Brand and reputation risks: Anything that diminishes IPH s reputation or brand would likely impact the level of enquiries, which in turn may reduce profitability and growth. Concentration of shareholding: Key shareholders can exert significant influence on company matters. Concentration may impact market liquidity / create stock overhang. Patent filing management and IT systems: Any interruption, loss or delay of IPH s IT facilities/tools, or loss of data/records, may impact IPH financially & with client relations. Page 5

6 IPH Limited as at 29 March 2017 Recommendation Buy Price $4.76 Target (12 months) $7.90 Table 1 - Financial summary Jun Year end e 2018e 2019e Price $4.76 Profit & Loss (A$m) Recommendation Buy Sales revenue Diluted issued capital (m) Change 19.4% 51.3% 34.8% 11.1% 6.6% Market cap ($m) EBITDA Target Price (A$ps) $ Change 41.0% 53.7% 13.7% 12.7% 9.5% Deprec. & amort. (1.1) (2.2) (1.9) (3.1) (3.6) Jun Year end e 2018e 2019e EBIT Valuation Ratios Net Interest (0.6) (1.0) (0.3) Underlying EPS ( ps) Pre-tax profit % change 40.9% 34.0% 7.2% 12.3% 10.2% Tax expense (9.7) (14.9) (17.9) (20.0) (21.8) PE (on underlying EPS) (x) tax rate 24% 24% 25% 25% 25% EV/EBITDA (x) Associates EV/EBIT (x) Minorities/Prefs Underlying Net Profit NTA ($ps) Change 41.3% 51.6% 14.8% 12.8% 10.2% P/NTA (x) 1, Abs. & extras. - (8.1) (4.5) - - Book Value ($ps) Reported Profit Price/Book (x) Cashflow (A$m) DPS ( ps) EBITDA % pay-out 70.5% 84.0% 84.2% 84.8% 85.0% Working capital changes (3.6) (6.6) (7.4) (3.9) (2.3) Yield (%) 2.8% 4.4% 5.0% 5.6% 6.2% Net Interest Expense (0.5) (1.0) (0.3) Franking (%) 65% 65% 74% 65% 65% Tax (4.8) (13.1) (15.1) (19.1) (20.9) Other operating items (1.8) (2.2) (1.1) (5.8) 0.1 Performance Ratios Operating Cash Flow Revenue growth (%) 19.4% 51.3% 34.8% 11.1% 6.6% Capex (0.6) (2.6) (2.4) (3.4) (3.7) EBITDA growth (%) 41.0% 53.7% 13.7% 12.7% 9.5% Free Cash Flow EBITDA/sales margin (%) 44.7% 45.4% 38.3% 38.9% 39.9% Acquisitions (3.9) (49.6) (31.7) - - EBIT/sales margin (%) 43.6% 43.9% 37.3% 37.4% 38.3% Disposals Dividends paid (26.8) (33.8) (40.9) (48.5) (54.4) Gross cash conversion (%) 87.2% 86.4% 88.4% 88.3% 97.6% Other investing items 0.1 (0.7) Free cash-flow yield (%) 4.1% 4.6% 5.2% 5.6% 7.2% Equity ROE (%) n/a n/a 22.9% 24.1% 25.2% Debt increase/(reductio 1.0 (10.6) (1.8) (3.1) (11.2) ROIC (%) 156.6% 44.1% 28.8% 28.6% 30.7% Capex/Depn (x) Balance Sheet (A$m) Cash Net interest cover (x) n/a n/a Receivables Net Debt/EBITDA (x) 0.1 n/a n/a n/a n/a Inventories & WIP Net debt/equity (%) 14.8% -26.5% -13.9% -14.3% -17.8% Other current assets Net debt/net debt + equity (%) 12.9% -36.0% -16.1% -16.8% -21.6% Current Assets Receivables Segmental Information Assoc & investments Fixed Assets Australia and New Zealand Intangibles Asia Other non-curr assets Other/Adj. (2.5) (4.5) (5.0) (5.4) (5.9) Non Current Assets Total Revenue (A$m) Total Assets Short term debt Australia and New Zealand Creditors Asia Provisions Corp/Elimin/Other - (4.2) (9.1) (7.5) (5.8) Other curr liabilities Total EBITDA (A$m) Current Liabilities Long term debt Half yearly (A$m) 2H15 1H16 2H16 1H17 2H17e Creditors Sales revenue Provisions EBITDA Other non curr liabilities Deprec. & amort. (0.6) (0.8) (1.4) (0.7) (1.2) Non Current Liabilities EBIT Total Liabilities Interest expense (0.4) (0.9) (0.1) (0.5) 0.2 Net Assets Pre-tax profit Share Capital Tax expense (5.5) (7.0) (7.9) (8.6) (9.3) Reserves (14.6) (13.2) (12.7) (12.7) (12.7)... tax rate 24% 23% 25% 24% 25% Retained Earnings Associates Shareholders Equity Minorities Outside Equity Interests Underlying Net Profit Total Equity Abs. & extras. - (4.9) (3.2) (4.5) - Reported Profit Net debt/(cash) $m 5.2 (58.8) (34.0) (37.1) (48.3) SOURCE: BELL POTTER SECURITIES ESTIMATES Page 6

7 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Jonathon Higgins Title/Sector Head of Research Phone tslim shaddad jhiggins Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape Sell: Expect <-5% total return on a 12 month view John Hester Tanushree Jain Financials Healthcare Healthcare/Biotech jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Associates Hamish Murray Tim Piper Banks/Regionals Diversified Resources Resources Associate Analyst Associate Analyst tslim lsotiriou parden dcoates hmurray tpiper Such investments may carry an exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 7