IPH Limited (IPH) – Short

From JOHN DENIZ  at Paragon Funds Management

IPH was the first of three patent and trademark law firms to list on the ASX between 2014 and 2016. Over this period, it has generally been another poor experience for investors in professional services firms.

All three companies (IPH, Qantm and Xenith) listed on the basis that intellectual property work was a steadily growing and stable ‘cash cow’. However, this was when these companies were in a position to roll up the sector in Australia and buy growth in Asia where patent and trademark volumes have been growing strongly.

In February, IPH reported a material negative surprise with earnings declining ~11% compared to the prior period, despite top-line growth of ~9% (via acquisition). A far cry from the steady growing ‘cash cow’ promised to investors.

The company struggled with a continuation of negative volume growth (-2%) in Australia (~66% of revenues), which resulted in a leveraged revenue decline (-5% pcp), with the bottom line experiencing smaller declines due to one-off cost cutting.

Our fundamental research included speaking to various industry contacts and has led us to conclude that the sector is more cyclical than it appears. We believe that the sector is facing a range of headwinds, which could have a further negative impact on earnings.

We believe IPH is ex-growth and at risk of materially downgrading again. IPH’s weak paper all but precludes it from making acquisitions (hampering their only remaining growth driver). We continue to remain short the stock despite the relatively low headline Price-Earnings multiple.

First posted on LiveWire