Xenith IP Group Ltd (ASX:XIP) shares gain on profit report

This morning intellectual property (IP) law firm Xenith IP Group Ltd (ASX: XIP) reported a net profit of $7.4 million on revenue of $126 million for the financial year ending June 30 2o18.

The profit fell 12% on the prior year, with revenue up 49%, however on an adjusted basis (stripping out one off costs, non-cash impairments, etc,) profit climbed 7% on the prior year to $10.4 million.

The company declared a final dividend of 4.5 cents per share to take total financial year dividends to 7.5 cents per share on underlying earnings per share of 8.3 cents. In total dividends were up 50% on the prior year with the payout ratio at a reasonable 70% of the adjusted net profit figure.

CEO Craig Dower said: “Our second half EBITDA performance of $10.3m was substantially stronger than the first half of $7.8m, with improvements in execution, a strong emphasis on cost control, and a return to industry growth in patent filings”.

The market appears to approve of the stronger second half in sending the shares 4.5% or 6 cents higher to $1.39.

Xenith is the holding company for IP law firms including Watermark, Glasshouse, Shelton IP and Griffith Hack.

It was notable today that the CEO flagged how the group is “making steady progress on the major cultural transition from a group of private partnerships to a publicly listed company with a unified collaborative culture and a strong focus on results.”

It is unusual for a law firm to go public as sharing profits is anathema to successful fee-earning partners and the law firms’ business model of incentivising hard work to attain partnership and a profit share. This is also applicable to other major professional service firms such as the big 4 auditors like PWC or Deloitte and is largely why they have never gone public.

The law firms that have gone public such as Xenith, IPH Ltd (ASX: IPH) and Slater & Gordon Limited (ASX: SGH) have all done so in order to raise capital to fund acquisition or roll-up growth strategies, with catastrophic (SGH) to moderate degrees of success.

As such it’s worth noting Xenith’s balance sheet is still in reasonable shape with net debt growing to $13 million from $11.2 million at the same time last year. The debt stands at just over 1x the adjusted net profit of $10.3 million, with the group reporting it has a debt facility up to $50 million.

In terms of growth the group expects to deliver cost savings, expand into Asia including China, and review staff remuneration structures now it’s operating under the pressure of a public company. When staff are your main costs and fee-earning assets (excluding support staff) you can see the problems a law firm faces in trying to please staff and shareholders at the same time.

At $1.39 Xenith shares are not especially cheap on traditional valuation metrics and as such it’s a business I’m not interested in as an investor.

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