Pinned straw:
@Rick first up, thank you for your thorough and characteristically thoughtful analysis of $IPH. I have also been thinking about this one, since you first asked the question (as it wasn't really on my radar screen before then).
I wanted to make two observations here:
- The long term track record of the business, and how to consider the current valuation in that context. (Is the bottom in? Risk?)
- AI - headwind, tailwind, both, neither?
This post simply tries to capture some thoughts stimulated by your work that ahve been rattling around in my head for the last week. I've not yet reached a conclusion on whether I am going to invest in $IPH - mainly because it is not in the class of businesses that normally fit with my investing style and "circle of competence" (or relative lack of incompetence!!)
1. Performance over the long term ("Being Paid to Wait ... But Waiting for What?")
As is often the case with roll-ups, EPS growth over the long term provides a good indicator of value creation.
And this is where IPH can be seen to be a laggard. Diluted EPS was $0.22 in FY16, and only advanced to $0.26 by FY25, a material decline in REAL terms (as shown below).
For me, this demonstrates that $IPH is not a high quality business. It is not something I would normally consider investing in for the long term.
However, that doesn't mean that the business isn't materially undervalued today. And do I am interested in the potential thesis of whether it represents a short/medium term value recovery idea.
Over the last decade FCF and DPS have grown steadily - underscoring that if the furture looks like the past, then this can be expected to be a solid performer on these metrics. As you've noted, the dividend yield is attactive, and it looks reasonable secure. (The business is not unduly leveraged, and so can flex to protect the payout if needed in the short term).
The arguable disconnect between the poor EPS progression and the cash and dividend metrics can be seen in the returns performance - a steady deterioration over time as the business has scaled through acquisition.
Arguably, management have been reinvesting rationally, until recently. If you consider that the WACC for this business is around 7.5% to 8%, than ROIC has fallen to the WACC, and so you'd expect a strong payout ratio, unless they can lift the returns of the operating business.
Note: The current ROE I have pulled from the Morningstar Quant. report (the source for all the above numbers) is 10.34, is a bit lower than yours.
I agree that this is the kind of stable business well-suited to using McNiven's Valuation method, and I note your recent valuation assumes that ROE will rise to 14%, a level which according to the numbers above we haven't see for quite a few years.
So my question, in considering this as a short/medium term recovery investment, is: are the following factors are enough to drive ROE enabling the re-rating of the business?
- leveraging #1 positions in ANZ/SG
- growing Canadian scale
- strong cash conversion and disciplined leverage
- apparent FY26 tailwinds: Asia filings, CIPO normalisation, cost-out, Canadian synergies.
I don't know the answer to these questions. But I think there are enough levers and also enough confidence from the historical performance that it is probably safe to say the bottom is in, and that indeed with a stable dividend we can "get paid to wait"?
My remaining question is therefore "wait for what"?
Which then turns me to my second point - a completely different point. And it is, how is the increased use of generative AI going to impact this business?
2. Generative AI - Headwind, Tailwind, Neither, Both?
The rise of generative AI is set to reshape demand for intellectual property services in complex, offsetting ways.
For firms like $IPH Limited, the most immediate impact will be in patent filing, where generative AI is driving a surge in new inventions and accelerating R&D productivity. This expands the pipeline of patentable ideas, while a shortage of qualified patent attorneys suggests underlying demand will continue to outstrip supply. However, AI will also automate much of the routine drafting and prosecution work, cutting billable hours and pushing clients to expect lower costs, creating margin pressure even as filing volumes rise.
Trademark services are likely to experience more modest effects. Their demand will still track overall business formation, branding activity, and e-commerce growth. AI tools will improve search and filing efficiency, and the explosion of AI-generated content may require new trademark strategies, but the overall impact is expected to be stable to slightly positive.
We can expect significant growth in IP defense and litigation. Generative AI introduces unsettled legal questions about ownership, copyright infringement, and the legality of training data, all of which are already fuelling lawsuits. As AI-related patents proliferate, so too will infringement disputes, freedom-to-operate analyses, and litigation over data use. Courts will actively set new precedents. This will drive strong demand for contentious IP work and high-value strategic advice.
For IPH, this evolving environment presents both opportunities and challenges. While overall volumes will likely grow, especially in AI-related patents and litigation, routine services will become more commoditised and margins thinner. Firms that invest in AI tools, reposition toward higher-value strategic and advisory work, and build expertise around AI-specific IP issues will be best placed to capture the upside. Done well, the growth in complex, premium work should more than offset any efficiency-driven compression in traditional revenue streams.
So, how is $IPH positioning itself in this area?
To date, it has said little. But we can glean a few clues from statements made over the last two years.
While $IPH Limited has not announced a sweeping AI strategy, it appears to be steadily positioning itself for an AI-driven future through incremental, practical steps. It has introduced a Group AI Usage Policy, begun developing in-house AI tools, and is assessing their financial impact, signalling a clear intent to embed AI into workflows to improve productivity and client service.
Alongside these moves, $IPH is advancing a broader digital transformation: upgrading case-management systems, standardising processes across practices, and expanding digital platforms like Applied Marks and IPHQ News. These initiatives will facilitate deeper AI integration over time.
Overall, $IPH’s approach appears to be cautious and deliberate. Rather than headline-grabbing announcements, it is quietly preparing its operations, services, and infrastructure to harness AI’s potential, enhance efficiency, and strengthen competitiveness in a rapidly evolving IP services market.
My Overall Conclusions
In the knowledge economy, using generative AI is going to become table stakes, if we are not already at that point.
Whether AI forms part of a value recovery thesis for $IPH in my mind depends on the interplay between two factors - external and internal:
1. The macro impact of AI driving innovation/ R&D and increasing the demand for IP services (both IP creation and IP defence)
vs.
2. The extent to which IP service providers like $IPH adopt AI to improve their own efficiency and productivity, and become able to do more for less.
The annual $8-10m cost out delivered through FY25 and flowing into FY26 contains a component of efficiency from embedding AI into workflows and broader platform optimisation. However, this seems a modest impact compared with the potential increase in demand for services that may be coming. On the face of it, it looks like $IPH is simpling putting up the table stakes, rather than creating a competitive advantage.
So, while it might not outperform its sector, if 1, (above) >> 2. (above), then we could see a marked improvement in performance over over the next few years.
No answers from me today, but I thought I'd share my thoughts.
Disc: Not Held (but considering)
Thank you for that very well thought out response @mikebrisy! Yes you are right about future competition and what exactly IPH doing about AI to stay in the race! You have also nailed the declining ROE which is a risk that I’m also concerned about. If ROE continues to decline from here, I think that’s the thesis broken.
I think ROE should improve with a greater focus on cost savings, efficiency and organic growth rather than more acquisitions. They have also faced some headwinds in Canada and lower US filings during FY2025, which have already started to improve and should continue to improve during FY2026.
This is probably not a business I will hold for a long time, IF the margins and ROE don’t improve from current levels, and I wouldn’t class it as a wonderful business currently, but it’s a decent business which is undervalued.
I see the proposition as this. Collect a nice 10% partly franked dividend while waiting for the cost savings to be implemented, the backlog issues in Canada to resolve, and the US filings to improve slightly, then reassess the margins, ROE, debt and overall quality of the business at the end of FY2026. If all this starts to improve the share price should climb, if not it will go the other way.
I don’t think the opportunity is clear cut for IPH, but I believe the risk/reward at a PE of 10x FY2026 EPS looks very attractive at the moment. Unless the business deteriorates considerably over the next 12 months, I don’t see a much downside in buying shares at the current price of $3.60 and collecting approx 40 cps (including franking credits). The shares would need to go below $3.20 at the end of FY2026 to be worse off.
@Rick you may well be right, and if you are, then those getting in at the moment are getting in at a decadal low and stand to be rewarded handsomely.
But having mulled this over, I can't get over the long run trend that, as the business has gotten bigger (revenue, largely via acquisition), performance - however you like to measure it (margin, EPS, ROIC, etc. ) - has declined.
I agree that on any historical basis, and when compared with comparable firms, it looks very cheap. But I think for a turnaround to happen, operational and financial performance need to turn. And I haven't been able to develop a convincing thesis for myself that they will. Reversion to some historical basis of valuation is not a necessity; rather it will be the outcome of performance.
Where I have landed for now (having mulled this over this week) before I will invest, I want to see the green shoots of delivery. If it does turn, then for sure there is so much potential upside, that even if I miss the first 10% or 20%, it could still be an interesting investment.
Part of what I don't like about this firm, is that the heritage of this business is a set of partnerships, which have become part of a listed company in which the orginal partners have little skin in the game (and might not even be there anymore, for all I know). In professional services, it is the partners who are the custodians of the competitive advantage, including the culture. But they now have little skin in the game. So where is the incentive for outperformance?
What even scares me more (as a fellow alum) is that the Executive in charge of "transformation" is an ex-McKinsey guy, whose CV doesn't convince me.
So, how about skin in the game?
The KMP appear to own only 0.91% of issued capital. The lion's share is wth the CEO, who has been there since 2017. Some 2.1m shares, worth almost $8m. Not overwhelming for an 8 year CEO. Still, he seems pretty comfortable, as his base salary is $1.4m, and only 31% of his FY25 rem was performance based.
As for the Board: Less than 0.26m shares between the 5 of them at EOFY25! The Non-Executives collectively own a whopping 0.1% of SOI.
And anyway, what are the Board actually doing? How can they have left the CEO in place for so long given the performance over the last 5 years?
OK, so the SP is knocked down. Let's see all the insider buying, cos these guys have all the insights into how bright the future is, and they all stand to make a motza if they buy shares, right? What are the signs of this from share purcahses over the last year+?
During FY25: Warne +5,495; Atkin +5,495; Carter +21,452; Qian +5,495; Wiadrowski +12,000; Blattman +154,023 (with –90,000 disposals).
Since FY25: Blattman +92,788; Wiadrowski +20,000 and 1,019 ; Mason +12,677;
Surely, this incredible value propostion must be apparent to these guys? (FFS, there's probably been more shares purchased this week by StrawPeople!!!)
In conclusion, I am interested in this firm as a recovery play. But I'd like to see two indicators by 1H FY26 that a recovery is in prospect.
Indicator 1: Positive movement of operations and financial metrics
Indicator 2: Directors and KMP keen to make themselves rich.
I've read a few analyst reports, and none of them convince me. Let's just look at their track record - they've just been following the SP down.
I am being slightly light-hearted and tonue-in-cheek as I write this final post of the week. And I am probably turning my back on a +30% or +50% return oppounity in the next year. After all, the capitulation after the "deadcat" bounce following FY25 results is pretty bad. Well, more than that, it's quite staggering.
And on dividend and earnings stablility the numbers don't seem to merit this treatment by the market. So I can see that the market is going to take stock at some point and perhaps recognise that the momentum has just carried this too far. The SP could correct +30%to +50% on that alone. Maybe that is the thesis. (I think this is the time we ask for @Saiton to work his wave magic?)
Still, I want some answers to questions:
- Why does gross margin keep falling?
- Why is it losing share in its home Aussie IP market? What's driving that, and will the trend continue? What if it does?
- Is Canada's IP process shambles getting fixed in the time that everyone thinks it is going to be?
- Are they delivering effective investments in the IT capability? (Between them, do the CIO and ex-McK Transformation guy actually know what they are doing?)
- Why doesn't management and the board believe they are sitting on a gold mine? (Maybe next week the penny will drop, and we'll see some big share purchases)
Is an alternative thesis that some PE player is going to come along, pay a 30% premium and take it private? If the SP falls much further, surely that is in prospect. There is ample precedent for it over the last decade or so:
PE Deals for IP Services Firms (Source: ChatGPT)
I'm shutting up shop for the week, but my research has thrown up more questions than answers.
Disc: Not held (yet) ... but it is on my Watch List