Buying the #1 market share IP firm in New Zealand
IPH Limited (IPH) has acquired AJ Park, New Zealand's leading patent group with approximately 20% market share, for NZ$66.1m. The group which was founded in 1891 has a substantial local client base ranging from large multinational corporations and universities to start-up companies and entrepreneurs. The firm employs 205 people and has offices in Auckland, Wellington and Sydney.
The purchase price is based on an adjuested FY17 EV/EBITDA multiple of 7.5x which is in-line with historic acquisition multiples. Consideration will be 60% cash (with IPH utilising US$ debt) with approximately 40% of new equity with the new shares issued subject to a two year escrow.
The company generates EBITDA margins in mid-high teens and we believe IPH has the capacity to increase these toward the mid 20% level over the coming years. Furthermore, IPH will be able to utilise its existing strong presence in Asia and offer these services to AJ Park clients, which are currently using competitors of IPH in Asia.
Changes to forecasts
In addition to incorporating the acquisition into our forecasts, we have undertaken further analysis of the underlying growth rates in the Australian and Asian markets. With the AUD/USD currenting at $0.78 we have made minor changes to our currency assumptions as well. After adjusting for these factors our earnings per share (EPS) forecasts increase by 3.9% in FY18, 5.3% in FY19 and 7.2% in FY20.
Following the acquisition announcement and the changes to our EPS forecasts we have increased our share price target. Key risks include lower patent activity and filings, adverse foreign exchange movements, integration risk, acquisition risk, key employee risk and increased competition.
We retain our Add recommendation.
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Disclaimer(s): Morgans Corporate Limited was a Joint Lead Manager to the Block Trade for IPH Limited and received fees in this regard.
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