Australian patent filing volumes bounce back in 2H18
Based on our analysis of the IP Australia filings data, the Australian patent filings market saw growth of 1.4% in 2H18 on the previous corresponding period (pcp). IPH Limited (IPH) however, strongly outperformed the market with growth of 5.1% on the pcp (after adjusting the pcp to include the AJ Park business). The 2H18 strength follows a 1.9% decline in filings seen in 1H18, due to the ongoing impact of the America Invents Act witnessed in the pcp numbers.
We estimate that IPH's market share at 30 June 2018 was 23.7%, up from 22.9% in the pcp (again after adjusting for AJ Park), and steady on the 1H18 result of 23.8%.
We forecast 50% of the buyback to be completed
We have assumed IPH have completed A$20m of the proposed A$40m buyback. We have also assumed the balance of the A$20m buyback is completed in 1H19 at an average price of A$4.50 per share.
As a result of the company funding the buyback with debt, our FY19 net debt to equity ratio increases to 8% (from approximately 2%). Importantly, on a FY19 ND/EBITDA basis leverage only increases to 0.3x (up from 0.1x), and given the company's strong cashflow we expect to see strong deleveraging achieved over the forecast period.
Updated earnings forecast
After updating currency forecasts (we are now using spot rates for forecast years) and making some assumption changes, our EBITDA forecasts for FY18-20 are A$72.7m (+1.0%), A$84.3m (+5.5%) and A$90.7m (+3.3%) respectively.
Following the incorporation of the buyback into the model and after adjusting for the DRP issuance in 2H18, our FY18-20 NPATA forecasts are A$52.8m (-1.3%), A$60.6m (+3.2%) and A$66.4m (+2.9%) respectively.
Our FY18 earnings per share (EPS) estimate has fallen 1.5% while the buyback and earnings upgrades see our EPS expectations increase by 5.15% in FY19 and 4.9% in FY20.
We view the FY19 PE of 14.5x as undemanding and have increased our share price target (Morgans clients can login to view). 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.
Morgans clients can login to view our detailed report and updated share price target for IPH Limited (IPH). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer(s): Morgans Corporate Limited was Lead Manager for the Block Trade of shares in IPH Limited and received fees in this regard.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.