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#Roused by Rouse Proposal
Added 4 weeks ago

QANTM RESPONSE TO MEDIA SPECULATION

QANTM Intellectual Property Limited (QANTM) confirms, in response to recent media speculation, that it has received a non-binding indicative proposal from Rouse International Holdings Limited (Rouse) in relation to a potential acquisition of all the shares in QANTM (Proposal).

Rouse is a UK-based international intellectual property firm operating in 12 jurisdictions, with a significant emphasis on the Asia Pacific region. It is highly complementary in both geographic and service lines to QANTM. It does not have a physical presence in Australia.

The Proposal is subject to a number of conditions, including completion of satisfactory due diligence, and negotiation and execution of transaction documentation.

Following careful consideration, including the potential strategic benefits of a combination of two complementary businesses, the QANTM Board has agreed to Rouse’s request to conduct due diligence with a view to putting forward a binding offer capable of being considered by shareholders.

Given the early stage nature of discussions there is no certainty a transaction capable of being considered by shareholders will eventuate.

The QANTM Board recommends that shareholders take no action at this time.

QANTM confirms that it is in compliance with the ASX Listing Rules, in particular, Listing Rule 3.1, and will keep shareholders fully informed in accordance with its continuous disclosure obligations.

QANTM has appointed MA Moelis Australia as financial adviser and Gilbert + Tobin as legal adviser.

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#Pause in Trading
Added 4 weeks ago

It looks like there might be some substance behind the AFR ‘Street Talk’ story. QIP has requested a temporary pause in trading pending a further announcement.

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#QANTM Snares a Bid
Added 4 weeks ago

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Early this morning the AFR (Street Talk) revealed that QANTM has received a privatisation proposal, in a deal expected to be announced Today (27/02/2024). I only just rediscovered this little gem a few months ago, and now there’s a possibility it will be swallowed up by private equity. Here’s the story:

QANTM Intellectual Property Snares bid; MA Moelis on scene - Sarah Thompson, Kanika Sood and Sarah Rapaport.

Sources said the Investec-advised acquirer is an offshore trade player, and had all but agreed terms with the Sonia Petering-chaired board.

Of note, Quadrant Private Equity deal makers and their cross-town rivals at Adamantem Capital submitted proposals to acquire QANTM, but were bested by the afore-mentioned suitor.

Sources said QANTM boss Craig Downer had been taking advice from MA Financial

QANTM may not be a household name, but it commands respectable market share on its patch. It owns Davies Collison Cave, one of Asia-Pacific’s largest patent and trademark attorney firms. Two of Australia’s top-three agents for trademark applications, Sortify.tm and DCC, are also in its stables.

The M&A interest comes at a time when QANTM, capitalised at $161 million on the ASX, has just reported its strongest set of numbers since it listed in 2017.

While its shares have risen 23 per cent in the past 12 months, the business is still a long way off the $295 million market capitalisation with which it debuted on the bourse. PE firms love to hitch a ride on turnaround, which is likely what Quadrant and Adamantem found compelling.

It tallied up $56.8 million revenue for the December half. Of note, underlying EBITDA shot up 25.7 per cent to $17.3 million, while net debt fell by 33.4 per cent to $21.7 million.

The business has three units, across patents, trademarks and litigation. Operations span more than 380 employees working five markets: Australia, New Zealand, Singapore, Malaysia and Hong Kong.

The biggest earner is litigation services, which spoke for two-thirds of total service charges at December 31.

QANTM’s trademark business reported a 12.8 per cent uptick in applications in the six months, which helped management offset a 12.7 per cent fall in Aussie patent applications during the period.

The C-suite is in the fourth year of a five-year program to modernise its technology systems.

It has migrated core production systems to Microsoft Azure, upgraded its IP management platforms used by attorneys, and automated tasks.

Next on the list is implementing a finance platform while, in the background, an “AI Working Group” is crafting QANTM’s strategy for the emerging technology.

-ENDS-

Held IRL (1%)

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#Outstanding 1H24 Result
Last edited a month ago

QANTM Intellectual (QIP) released an outstanding result after the close of trade yesterday (19/02//2024). Earnings are well ahead of analyst expectations (albeit low coverage) and the market has reacted positively today (up 10%).

Here are the Key Financials:

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Source: 1H24 Results Presentation

  • Service Charges of $56.8m (1H23: $52.0m)
  • Patent Service Charges up 6.6% to $37.8m (H123: $35.4m)
  • Trade Marks Service Charges up 7.0% to $11.1m (H123: $10.4m)
  • Legal Service Charges up 27.3% to $7.9m (H123: $6.2m)
  • Total Revenue (Service Charges and Associate Charges) increased 8.1% to $74.2m (1H23:$68.6m).
  • Total Net Revenue of $58.8m (1H23 $54.1m), increased by 8.7%, and is after recoverable expenses from Associate Charges of $16.6m (1H22 $15.7m).
  • Underlying operating expenses of $41.5m (1H23: $40.3m). Operating expenses include an extra $0.5m in technology expenses due to cloud hosting implemented in January 2023.
  • Underlying EBITDA was $17.3m (1H23: $13.8m).
  • Statutory net profit after tax of $7.4m (1H23: $3.4m) an increase of 117.2%.
  • Underlying net profit after tax of $9.6m (1H23: $6.7m) an increase of 43.4%. The appendix provides a reconciliation from statutory to underlying NPAT.
  • Net debt at 31 December 2023 was $21.2m (1H23: $31.8m). The ratio of net debt to underlying EBITDA was 0.61 at 31 December 2023 (30 June 2023: 0.85). At 31 December 2023, the Group held cash and cash equivalents of $6.2m (1H23: $1.7m).
  • Cash Flow before acquisitions, financing activities and tax was significantly higher at $14.0m (1H23: $3.5m) due to: better financial discipline having been put in place; a $1.1m reduction in property fit out costs; and $1.0m in EST payments being issued in shares and not settled in cash.

Source: 1H24 Results Announcement

Outlook

Craig Dower, QANTM’s Chief Executive Officer and Managing Director said “We expect our strong first-half momentum to continue, and recently advised the market of an upgrade in our earnings outlook for the FY24 full year compared to the analyst estimate. Trading performance in January has been strong and we maintain that positive outlook. We also continue to maintain a positive outlook for the industry as a whole, and expect to see continued growth across our three businesses: DCC, FPA and Sortify.tm. This is now the fourth consecutive period of margin improvement, after a period of substantial investments in our strategic initiatives, and we expect to see underlying margins continue to be in the low 30’s.”

Valuation

Recently QIP upgraded FY24 earnings guidance from 8.1cps to approx 10 cps (see Earnings Guidance Upgrade straw). Given earnings for 1H24 came in at 5.29 cps, I think this very achievable. On current equity of 52 cps that’s a ROE of 19.2%.

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I believe QIP has strong tailwinds going forward following recent investment in technology to improve its platform (including incorporation of AI), and from expansion of the Sortify.tm business globally.

Using McNiven’s Formula, ROE of 20% (accounting for stronger future growth), Equity 52cps, 30% of earnings reinvested into growth, fully franked franked dividends (11% including franking credits), and a required return of 12%, I get a valuation of $1.30. At $1.30 QIP would be trading on a PE ratio of 13 x FY24 earnings guidance. This is slightly higher than the average annual PE over the last 6 years (12%) but I think this is reasonable given the quality of the business is improving.

Held: IRL (1%)

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Valuation of $1.200
Added a month ago

I have been following QIP for over a year and first entered with real money at around $0.90. QIP is number two in the space behind IPH, and I feel that QIP is a higher quality business trading at a significant discount to fair value for the stable cashflow and dividend, with repeat sticky business growing organically (albeit slowly). Recently QIP have engaged RaaS Group to produce coverage valuing the company at >$1.50. My own more conservative valuation is around the $1.20 mark.


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#Earnings Guidance Upgrade
Last edited 2 months ago

On the 23rd January 2024 QANTM Intellectual Property Limited (QIP) updated FY24 earnings guidance compared to the analyst estimate.

The update was provided on that basis that market conditions, industry conditions, the US$ to AU$ exchange rate and the regulatory environment do not materially change.

For the full financial year 2024, QANTM expects Earnings Per Share (reported) to be between 20% and 25% higher than the analyst estimate of 8.1 cents per share.

For the full financial year 2024, QANTM expects underlying EBITDA (post AASB 16) to be between 8% and 10% higher than the analyst estimate of $31 million.

The increase in expected earnings is mainly driven by:

1. improved financial disciplines, focused on more effective cost management and the reduction of debtor days;

2. the implementation of strategic initiatives starting to deliver increased benefits;

3. stronger than expected performance by Davies Collison Cave and FPA Patent Attorneys, in particular by Davies Collison Cave Law in the provision of intellectual property litigation services over an extended period; and

4. stronger than expected foreign exchange tailwinds.

Caution should be exercised in relation to any prior corresponding period comparison given it was a softer period during which QANTM made major investments across technology, people, processes and clients.

The key assumption that patent and trademark filing activities globally remain consistent with current trends continues to apply.

QANTM’s earnings announcement will be released on 22 February 2024 with full details to be provided at that time.

My Comments

I added QANTM to our IRL portfolio a few months ago based on its growing SaaS business (Sortify.tm) which I believe has the potential to be a global disrupter in trade mark protection. Sortify.tm’s mission is “making trade mark protection available to anyone”. Currently QANTM is only a small holding in our portfolio (1%) due to it’s low liquidity making it difficult to acquire (and perhaps difficult to sell, if needed!).

“Sortify.tm Attorney is the world’s only AI-based Software-as-a-Service (SaaS) suite of trademark classification and productivity tools, built by trademark attorneys for attorneys.

The intelligence of Sortify.tm’s software allows trademark lawyers and their teams to carry out everyday tasks smarter and faster across all stages of the trademark process - pre-filing, filing, examination and registration.” (From the Sortify.tm website: https://www.sortify.tm/)

QANTM acquired Sortify.tm in September 2021 for $11 million, with an upfront payment of $8 million and deferred payment of $3 million in two annual instalments (https://www.lawyersweekly.com.au/newlaw/32362-qantm-acquires-sortify-tm-for-11m)

Sortify was founded in New Zealand as a traditional trademark practice and evolved into a legal tech company providing technology solutions to brand owners, IP practitioners, and public and private sector entities.

During FY23 Sortify.tm achieved record volumes in its main markets as the No 1 filer of trade marks in Australia, No 2 in NZ, and it is approaching the top 10 in the UK which is a very large market.

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Source: Investor Briefing, 31 October 2023 (https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02733184-3A629660)

Sortify platforms have been established in Singapore, Malaysia and Hong Kong with promising early traction. Asian countries filed 67.6% of global patent applications in 2021 (largest patent market globally).

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QANTM intends leveraging the Sortify.tm automation expertise into its DCC and FPA platforms.

QANTM is also looking for opportunities to further expand into Asia (eg. Thailand, Indonesia and India).

The analyst providing guidance for QANTM on Simply Wall Street (I believe it’s Bell Potter) is forecasting 25% annual earnings growth over the next few years.

I think this business is interesting and is worth some further investigation. As I research further into QANTM and Sortify.tm I hope to add further straws.

Held (1%)

About QANTM Intellectual Property

QANTM Intellectual Property Limited (QANTM, ASX: QIP) is the owner of a group of leading intellectual property (IP) services businesses operating in Australia, New Zealand, Singapore, Malaysia and Hong Kong under key brands Davies Collison Cave, DCC Advanz Malaysia, Davies Collison Cave Law, FPA Patent Attorneys, and Sortify.tm Ltd (including Sortify’s brands – DIY Trademarks, Trademarks Online and Trademark Planet). With more than 150 highly qualified professionals, the businesses within the QANTM Group have a strong track record in providing a comprehensive suite of services across the IP value chain to a broad range of Australian and international clients, ranging from start-up technology businesses to Fortune 500 multinationals, public research institutions and universities.

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