IPH Limited: Borders open, time to travel
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 18 February 2022, 10:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- IPH Limited (ASX:IPH) reported LFL EBITDA growth of 5% (to A$64.8m) on LFL revenue growth of +2.8% on pcp. Divisional LFL EBITDA growth was Australia +5% and Asia +10%.
- The underlying result (EBITDA +11% to A$68.3m) was assisted by a net currency benefit of A$2.7m and A$0.8m acquisition contribution.
- Domestic filings market share slipped (290bps to 33.9%) on integration disruption and a decline in filings from a large client. Implied Singapore market share also fell from heightened 2H21 levels (2H21 25.9%; 1H122 implied 22.6%).
- IPH’s balance sheet strength (gearing at 0.4x EBITDA) allows for debt funded acquisitions, which remain core to the strategy. Offshore expansion appears inevitable and should add to the medium-term growth profile.
- Whilst upside to our valuation is thin, we consider the core earnings base as relatively defensive, with likely upside from acquisitions in time. A successful offshore acquisition is central to our retained Add recommendation.
1H22: 5% like-for-like EBITDA growth
IPH’s 1H22 adjusted (excluding currency, acquisitions, one-off costs) financials included: group revenue +3% to A$184.8m; and EBITDA +5% to A$64.8m. Including favourable currency and acquisition contribution, group revenue was +6.5% to A$191.4m; EBITDA +11% to A$68.3m; and NPATA +15% to A$43.2m. Overall, the result beat consensus expectations, however this was on currency.
On an adjusted/LFL basis, divisional results were: ANZ revenue up 1%, EBITDA +5%; Asia revenue +9%, and EBITDA +10%. Below-the-line expenses and one-offs totaled A$13.4m, including ~A$2m for acquisition-related expenses.
The Australian division posted 5% LFL growth, after being flat for the first 4 months. This was despite filings being weak for the final two months.
The interim dividend of 14.5cps was 3.6% on the pcp (14cps) and IPH ended with A$41m net debt (~0.4x EBITDA). Gross cash flow was solid (typical 1H >100% conversion), up 3.8% to A$65m. Avg 1H22 AUD/USD was 72.6c (spot <72c now).
Analysis: market shares softer over 1H22
Australia market share declines: 1H22 Australian filings were up 1.4% on pcp. Filings were +8.7% for the 4 months to Oct-21, implying a much weaker Nov/Dec. IPH noted the Spruson/Shelston merger impacted, as well as lower activity from S&F’s largest client. Excluding the large client impact, filings would have been +4.3%. Australian market share fell to 33.9% in 1H22 (from 36.8% pcp). Management expects the disruption to be temporary.
Singapore filings share increased CY21 from CY20, although implied 1H22 market share dropped to 22.6%. IPH noted 4Q21 market filings fell 1.2% on a significant decline from one of the largest filers in the market (also a client of IPH). Asia filings (other jurisdictions) were up 16.2%, with continued strong growth in China (16.9%).
IPH reaffirmed expected integration synergies, with A$1-1.25m of EBITDA synergies expected in FY22 (an incremental A$0.8m in 2H22; annualised synergies of A$2-2.5m).
No firm statements were made on acquisitions, however international acquisitions remain a focus.
Forecast and valuation update
Upgrades are driven by a slightly better-than-expected underlying 1H22 result and currency benefit. FY22-24 EBITDA is upgraded by ~3-5%. Currency remains the largest swing factor to near-term forecasts.
IPH maintains a defensive core business with solid cash flow generation. The group has a proven track record of consolidation: adding to the strength of the ‘network’ and delivering medium-term growth. Further acquisitions will feature in time and should add to our base-case earnings forecasts.
Price catalysts and risks
Acquisitions, better-than-expected patent activity and filings, and favourable FX.
Adverse FX movements, loss of major client relationship, lower patent activity, acquisition integration risk, key employee risk and increased competition.
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