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2 fast-growing law firms for your watch list

The annual number of Australian patent and trademark applications has nearly doubled since 1996. Globally, the number of patents filed has risen four-fold over the same period driven by the USA and China.

The Australian’s government recent innovation campaign designed to boost the economy is not unique. Governments all over the world are looking to technology to improve the fortunes of their people and globalisation means that companies are increasingly looking to protect their intellectual IP in multiple jurisdictions.

That is good news for legal firms that provide intellectual property services and fortunately for investors there are two such companies that have recently listed on the ASX.

IPH Ltd (ASX: IPH) debuted on the ASX at the end of 2014 and has wasted no time in acquiring five companies since then. It is the market leader for filing patents in Singapore and Australia and number two for Australian trademarks. Its also has a strong presence in other South East Asian countries.

IPH generates revenues from the initial patent filing period right through to managing the patent until it expires which can be up to 20 years later. This attractive model should lead to a stable, growing revenue profile for the company.

IPH employs a “hub” strategy where it operates two key IP hubs in Australia and Singapore that provide a “one-stop shop” for clients and helps coordinate patent applications in up to 25 countries in the Asia Pacific. The ease of dealing with a single party is attractive to companies looking for regional IP protection and is a significant competitive advantage for IPH.

In its first year as a listed entity, IPH comfortably beat prospectus forecasts even after adjusting for favourable currency moves. It recorded a “constant currency” net profit after tax (NPAT) of $26.4 million versus a forecast of $23.8 million. Pleasingly, this profit was entirely converted into free cash flow which if maintained should enable IPH to pay a high dividend whilst simultaneously pursuing acquisitions.

The latest half yearly accounts show continued impressive top and bottom line growth and the company looks set to deliver underlying earnings-per-share of around 30 cents in 2016. That places it on a price-to-earnings (PE) multiple of just under 21 at current prices which is reasonable given the strength of the company and the fact it has no debt.

Xenith IP Group Ltd (ASX: XIP) is much smaller than IPH but is the oldest and consistently ranks as one of the top IP firms in Australia by industry magazines. It holds a share of just under 6% in the Australian patent market compared to a 13% share for IPH. Xenith claims that it is the only top five full service practice to have organically gained market share over the last five years.

The company’s client base is diversified with the majority of work coming from European and US corporations. It has recently introduced billing in US dollars to cater for its international customers and this has had a favourable impact on recent results.

Xenith also offers services throughout the IP lifecycle and is looking to grow by acquisition, but unlike its larger rival it has no Asian presence. However, it has identified a growing niche in the Australian market for Chinese applicants seeking IP protection.

Since 2000, the number of international patent filings originating from Chinese applicants has grown by a compounded 28.3% annually, albeit from a small base. Xenith has invested in Mandarin speaking staff in its Sydney offices and is developing relationships with Chinese IP firms in order to capture this opportunity and establish a first mover advantage. It now represents more than 200 Chinese clients and processed 18% of all Chinese patent applications filed in Australia in 2015.

Like IPH, Xenith has had a good start to listed life, announcing in June that it expects to exceed its prospectus forecast revenue by 8% and deliver pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) of $8.8 million to $9 million. Assuming minimal interest and depreciation charges and a 30% tax rate I estimate that Xenith is trading on a PE multiple of 21.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. 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.

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