IPH Limited (ASX IPH),ย founded in 1887,ย is an intellectual property company withย aย numberย of independent professional businesses.ย IPH shares are well positioned to take advantage of the globalisation trend in the legal services industry with growth coming from global acquisitions. Should you buy IPH shares?
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The companyย is the first IP services group listedย on the Australian Securities Exchangeย (ASX). In 2018, IPH shares becameย an ASX 200 company with nearly $AU1 billionย inย marketย capitalisation.
The company provides a wide range of IP andย dataย services related toย theย provision of filling, prosecution, enforcement and management of patents. The services supportย aย diverse clientย baseย ofย Fortune Global 500 companies, public sector research organisations, foreign associates and local clients. IPH Limited servicesย a multidisciplinary team including 450ย employeesย andย operatesย across several countries,ย includingย ย Australia, New Zealand, the Pacific Islands and Asia.
Increasing Presenceย of IPH Abroad Through Acquisition
IPH Limited has beenย focused on increasingย their presence inย theย Asian marketย throughย theย acquisition of a predominantly trademark businessesย in Beijing and Hong Kong.ย The company has alsoย openedย new offices in Thailandย andย Indonesiaย withinย the past 18 months. The companyโsย acquisition strategy continues toย beย aimed at increasingย businessย inย high growth Asian regionsย to add value to the business and create potential to generateย aย solid financial return for shareholders.
As a result,ย trademarkย filings in IPH have increased by 38% comparedย to that ofย theย previous year along with the opening of theย Spruson & Fergusonย in Melbourne. Furthermore, the trademark of Spruson & Fergusonย (Asia) hasย grown by 50% in 2017 comparedย to 2016.
Both new and existing clients have responded wellย to theย expansionย ofย theย companyย in theย Asianย market,ย as the number of cases transferred is significant in the past 12 months. The new corporate structure providesย opportunity for IPH to renew and ensure leadership in IP services, whichย laysย a strong foundation for future growth.
However,ย ย there are risksย to ensure thatย targetedย companiesย canย properly integrateย into IPHย andย whether the target company matchesย IPHโs strategic objectives, values and culture. IPHย worksย throughย an extensive due diligenceย process, whichย coversย relevant matters relating toย theย target company.ย Legal contracts are required to be completedย forย everyย companyย acquisition, including appropriate indemnities and warranties and employment arrangement with key individuals.ย Whatโs more, most acquisitions of IPH are paid by its shares, whichย areย required to be escrowed for up to 2 years.
Increasing Globalisation Trend in The Legal Services Industry
Even though the competition inย theย legal service industry isย substantial, thereย areย someย areasย that haveย not been exploited completely.
A high growth rate in Asia-Pacific andย aย huge overseas market give local companies an opportunity to expand their operationsย acrossย theย territory. IPHโsย visionary insight assistsย them to hold market share inย theย intellectual patent field.
Due to a large number of local law firms offeringย services mainly inย theย domesticย spaceย globalisation is not high inย theย legal service industry. IPH noticed the high-speed growth inย theย Asia region and captured this trend to expand operations inย theย Asian market via acquisition in Hong Kong, Beijing, Thailand and Indonesia.
In 2017, revenue generated from Asian IP businessย grewย by 14%,ย up to $68.6ย million inย total;ย $9.9 millionย of this sumย came from the acquisition ofย Ella Cheong Ltd in Hong Kong. From the perspective ofย theย CEO, IPH still viewsย Asia as an attractive growth centreย in theย comingย 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 mayย removeย the marginย thatย traditionally belongs to legal service firms. Additionally,ย heavily restricted regulations existย inย theย legal service industry. Law firms have to abide by the regulationsย in theirย jurisdiction, whichย limits the local firms to operate interstate.
In recent years, another two legal service firmsย have becomeย competitorsย in IPHโs market,ย Xenith IP Groupย (ASX: XIP)andย Qantmย Intellectual Property Limitedย (ASX: QIP),ย which haveย both beenย listed on the ASX andย haveย major acquisitionย strategies in theirย immediate business plans. This might affect IPHโs share price and take away the profit margin inย theย Asia region.
Earningsย per share show the percentage of a companyโs profit related to numbers of outstanding shares.ย Investorsย looking forย a steady source of income by estimating the probability ofย anย increase in dividendย can do thisย through EPS ratio.
The EPS of ASX IPH shares steadily increasedย during the past three years as EPS in 2017 was 22.33, comparedย to 21.7 in 2016 and 19.48 in 2015. The high EPS ratio of IPH also indicatesย that itย can payย aย significant dividend for shareholders.
IPH’s dividend yield is currently 6.33% and could see dividends increase with EPS growth.
IPHโs profit marginย has not changedย since IPH become listed, even though it experienced aย slight decline.
IPH still have quiteย aย high-profit margin of 24.46% in 2017, compared with competitors Xenith IP Groupย atย ย 10.6% and Qantm Intellectual Property Limited with 1.31%.ย Furthermore, IPH shares have a comparatively high ROE ratio of 18.58% with no borrowingย carried outย in 2017, in contrast with Xenith IP Group ROE of 5.97% and QANTM Intellectual Property Limited ROE of 1.84%, which isย aย 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 ratioย 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 Expectedย in Future Yearsย for IPH
Overall, ASX IPH shares performed wellย throughoutย ย the past few years,ย and it has great opportunitiesย in the future.
By continuing its acquisition strategy of other companies in different areasย andย embracing theย globalisation trend inย theย legal services industryย their performance should continue to do well.
