Xenith IP Group Ltd smashes prospectus forecasts: Is it a buy?

A solid debut year for Xenith IP Group Ltd (ASX:XIP).

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earlier today IP legal group Xenith IP Group Ltd (ASX: XIP) announced its results for 2016. The shares were up 1.4% in early afternoon trading. Here are some of the key takeaways:

  • Pro forma revenue of $32.2 million, up 19% on 2015 and 8% on prospectus forecast
  • Pro forma net profit after tax (NPAT) of $6 million, up 71% on 2015 and 28% on prospectus forecast
  • Pro forma earnings-per-share (EPS) of 18.2 cents, up 71% on 2015 and 27% on prospectus forecast
  • Final fully franked dividend of 7 cents
  • Net cash position of $0.9 million

These are impressive results but they were assisted by the company's switch to billing in US dollars and subsequent favourable currency moves. Prospectus forecasts assumed an average Australian dollar to US dollar exchange rate of 0.76 for the year but actual rates came in at 0.73.

It is hard to know how much of Xenith's strong performance is driven by currency given the company does not split out these effects in its results. This is in contrast to larger peer IPH Ltd (ASX: IPH) which reported flat revenue and an 11% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) in its Australian business before currency impacts.

Xenith recorded EBITDA margins of 33.6% in 2016, up from 24.2% in the prior year which the company said demonstrated "the significant operating leverage in the business". IPH's Australian arm is almost twice the size of Xenith and recorded EBITDA margins of 45.4% in 2016 supporting the view that there are significant scale advantages in this type of business. Perhaps this also indicates that Xenith has more scope to improve margins than IPH as it grows in size.

Xenith is likely to deliver continued growth in 2017 due to the acquisition of Watermark Group announced on 23 August 2016. Xenith will pay $19.5 million for the business which it expects to generate sustainable EBITDA of $2.5 million. Around half of the consideration will be paid in cash with the rest paid in equity.

An attractive feature of IP firms is that they earn long-term recurring fees throughout patent and trade mark lifetimes which can be many years. They also carry little work in progress on their balance sheets and so cash flows are healthy. Xenith's operating cash flows for 2016 were $6.6 million representing 86% of EBITDA.

Xenith is actively targeting Chinese clients filing patents under the Patent Cooperation Treaty (PCT). Such applications have grown 21.2% per year on a compound basis since 2001 and Xenith has opened a China desk in its Sydney office staffed by Mandarin speaking Chinese nationals.

As technology continues to pervade our lives, the value of IP continues to rise and demand for IP protection services is likely to follow on. The trend is more pronounced in developing countries and so I prefer IPH as an investment to Xenith due to its greater exposure to South East Asia.

Motley Fool contributor Matt Brazier owns shares of IPH Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »