Pinned straw:
There are a few things having an impact on the IPH share price since my previous straw, resulting in the share price declining 8% from $3.59 to $3.30. Earlier this week the share price hit $3.23, which was an eleven year low!
I think the negative sentiment and a shocking chart is definitely having an impact. This is also being exacerbated by a few other things lately.
In the S&P Dow Jones Index Quarterly Rebalance announced on 5th December, IPH will be booted from the ASX 200 prior to the open on 22nd December 2025. If the passive fund money hasn’t already been withdrawn from the IPH share register, it soon will be. This will put further pressure on the share price.
I think short sellers were already anticipating IPH would be booted from the ASX 200 and started shorting IPH during in late August. As of the 11th December there were short positions on 11% of IPH shares (top ten on shortman.com).
The IPH trading update on the 20th November did nothing to prevent further short positions during December.
I thought the trading update for the first 4 months of FY26 was reasonably positive for the overall business:
- Unaudited IPH Group Revenue was $241.7 million, up 7% on the same period last year
- Group Underlying EBITDA of $72.4 million, up 13% on the same period last year.
Positives
Growth was a result of the prior year acquisition of Bereskin & Parr, organic revenue growth in both Asia and Canada as well as a positive movement in foreign exchange rates. The average AU$/US$ exchange rate for the first four months of FY26 was 65.4 cents compared to 67.0 cents for the PCP.
The Group Underlying EBITDA improvement was also assisted by a reduction in corporate costs, which will remain a focus across the rest of the financial year and beyond.
Negatives
Most of the negatives are associated with Australia and NZ which contribute 43% of the group’s earnings.
Earnings decline continues in Australia and NZ, impacted by lower US PCT filings and the economic downturn in NZ (Australia and NZ contribute 43% of earnings).
IPH member firms have a significantly higher exposure to US clients relative to the market, and IPH’s Australia/NZ segment is impacted by the decrease in market filings from US applicants.
The Australian patent market has also included an unusually high number of self-filed provisional applications (i.e. applications which are not attached to a filing agent) which have increased by 222% for the year-to-date period compared to the PCP. At this stage, it is unclear what is driving this somewhat unusual activity.
FY26 Focus
While the macro environment has been challenging, we are focused on driving organic growth and generating operating efficiencies.
Given the ongoing decline of US PCT filings into Australia and NZ, we are re-focusing our business development activities to target second tier associate firms for filings into our member firm jurisdictions.
We have also deliberately re-focused and significantly boosted our business development activities to target Western Europe, Japan, South Korea and Chinese incoming filings.
Our focus in Canada is to leverage our integrated platform and to harness the beginnings of a recovery in patent workflow following the CIPO systems issues to deliver growth.
While in Asia, we are building on the current filing momentum to deliver revenue and earnings growth.
As we detailed at our full year results, we have realigned our cost base to drive operational efficiencies which will deliver annualised cost savings of $8-10 million from FY26.
My Take
Yesterday IPH shares closed at $3.30 per share. I think the risk/reward for this business at $3.30 is attractive and I have added more to our holding. The share price could fall further yet because of the short selling and poor sentiment. The chart doesn’t show much support above $3.30 per share.
Fundamentally, the ROW business is showing signs of growth and the temporary issues in Canada are now resolving. ROW makes up 57% of the groups earnings and this is likely to continue growing slowly. The business also has consistent strong cash flows which are forecast to continue. Earnings per share is forecast to be higher in FY26 at 39 cps, up from 26 cps in FY25 (analyst consensus), putting IPH on a forward PE of 8.5, which seems incredibly cheap! Based on forecasts the FY26 ROE could be 14%. Not amazing, but reasonable.
It is feasible for IPH to continue paying a solid dividend, possibly 37 cps. IPH has a track record of increasing dividends every year for a decade. At the current share price I am anticipating a yield of over 12% (including 25% franking credits for the Australian component). Over the next 15 months (3 dividend payments) it’s feasible IPH will pay shareholders 54 cps in partly franked dividends.
There are a lot of ‘if’s’, ‘but’s’ and ‘maybe's’ with my thesis, and the short sellers could turn out to be right! The analysts and the short sellers seem to be poles apart on their views for the business. I’m working on the 4 month trading update continuing for FY26, with earnings and cash flow both higher than for FY25.
Held IRL and SM
Thanks @Rick for the analysis, IPH is looking like good value as you point out. I held it for a couple of years Sep16 to Sep18 and made about 20% + Div, but ultimately sold because I didn’t have faith in the business model, would have close to doubled my money if I waited another year, but I still think it was the right call.
The problem I have with IPH is that as a professional services company it relies on key people who own the clients more than the company does (like accounting firms) and as such is better as a partnership model. The Munger quote “incentives matter” always rings in my ears when I see IPH.
To keep those key people, they have to have an increasing share of the margin, giving them shares isn’t going to be enough because they are only going to own a very small part of the company, so there is still an incentive to take their clients and margin to another firm. The loss to the company (and shareholders) is small, but the gain to the employee is large. Repeat this over most of your key people enough and it does impact the company.
To illustrate that most of the benefits of the business growth have gone to insiders, look at performance over the last 10 years (FY17-25).
Revenue: $184m to $709m (+285%, 14.4R)
Sales/share: $0.96 to $2.65 (+176%, 10.7R)
Shares: 191.7m to 260.5m (+36%, 3.1R)
EPS: $0.23 to $0.37 (+61%, 4.9R)
DPS: $0.22 to $0.37 (+68%, 5.3R)
EPS has dropped from 24% of Sales/share to 14% while the company has grown 285%. That’s the opposite of Operating Leverage which is what I want to see.
There is still a case for value at a price (I agree it looks like value at $3.30), but for much of it’s life on the market the return to shareholders has fallen well behind the business growth and it’s been priced for business growth rather than shareholder returns.
Interesting value play, but not long-term hold due to the business model.
I agree with all that @Tom73. The margins and ROE tell this story.
IPH is not what I would call a high quality, forward looking business, and it is not the investing style I prefer to play. This is purely a value play for me. I’m here because the earnings look to be stabilising, or gradually increasing. If this happens, it will look cheap next year! If not, the share price will continue to struggle.
Australia and NZ is a worry. Even iPH management are scratching their heads over the huge increase in self-filed US PCT filings from Australia. I read a comment from an analyst that pointed out that the success rate for self-filings is low, and after a few failures businesses revert back to filing through agencies. The analyst thought this phenomena was cyclical. I don’t know enough to comment, but it is a big enough risk that IPH aren’t waiting to see what happens and instead are turning to other income streams.
I could be wrong on earnings growing, and I don’t expect margins or ROE to improve much from FY26. The share price seems to be taking a real beating for a business that keeps growing free cash flows and dividends. I think every business has a price where you can make good money if the “owners earnings” are consistent enough. I’m not sure what the right price for IPH is, but it must be getting close! It will all depend on what happens to earnings and free cash flows from here. IPH could be just one huge value trap. It has certainly snared me!