Fortune to be made from this legal company


This week's Hot Stock, courtesy of Roger Montgomery from Montgomery Investment Management, is a legal company.

IPH/Spruson & Ferguson (ASX:IPH)

Key statistics:

an end to the bull

Closing share price 23-8-16: $5.760

52-week high: $9.430

52-week low: $5.770

Most recent dividend: 10c

Annual dividend yield: 3.78%

Franking: 50%

On November 19, 2014, after an initial public offering at $2.10 and a forward price-earnings ratio of just 13.9, patent and trademark attorney IPH/Spruson & Ferguson (ASX: IPH) began trading on the ASX. At the time of the float our valuation was $2.60, so any allocation of shares was well received by every fortunate manager. By February this year the shares had reached $9.34.

Following the release of first-half 2016 result, IPH began a long march down and today the shares trade at $5.76. So is this an opportunity?

Established in 1887, Spruson & Ferguson is considered the leading intellectual property (IP) firm in Australia and, increasingly, Asia, with the largest market share in Australia and Singapore. Offering protection, commercialisation, enforcement and management of intellectual property across the Asia-Pacific region, IPH enjoys not only a high return on equity but also the comfort of a "sticky" client base that includes Fortune Global 500 companies based in the US, Europe and Japan.

It's worth noting that IPH's top 20 clients have been sewn on for almost 15 years.

Having visited the company's Singapore office, I came away convinced its extraordinary profit margins were a function of a money-printing machine.

With Australia largely a mature market but patent applications and protection becoming a more acceptable part of business in Asia, the real growth for IPH is in Thailand, Indonesia, and the Philippines, particularly in the engineering sector.

The outlook for the company includes a "game-changer" acquisition of a business founded in London and with offices now in Beijing, Shanghai, Moscow, Indonesia and Malaysia. This business has 600 staff, with 400 in China and 80 in London and Moscow, and it has been suggested it would take 20 years to replicate.

The declining share price appears to have correctly factored in the possibility that the company would report full-year results that would miss expectations. However, there were some genuine one-off items in the results and the biggest was the due diligence costs relating to the acquisition, which has not been completed yet.

That, combined with chatter about industry-wide pressure on prices as well as founder shares emerging from escrow, explains the lower price. At some point the price becomes compelling and our valuation is still a little lower.



Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide,, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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