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Why the IPH Limited share price is heading higher today

Shares in intellectual patent firm IPH Ltd (ASX: IPH) are up 4% to $5.21 in trade today after the group provided a positive trading updated to the market at its AGM held in Sydney today.

IPH Ltd is the holding company behind several leading patent attorneys in Australia and Asia including Spruson & Ferguson, AJ Park and Ella Cheong. 

In July 2018 the group completed the merger of two its leading firms in Spruson and Ferguson and Fisher Adams Kelly Callinans to form a combined firm under the Spruson and Ferguson brand.

The group has long had an acquisitive strategy as the IP patent law firm market is still relatively fragmented and offers opportunity for IPH to continue its “roll-up” strategy.

One advantage of the acquisition and merger strategy is that the group can pull out shared costs from combined law firms such as support staff in human resources, administration, or marketing functions, in order to have a cost-to-income ratio weighted more towards fee-earning patent attorneys.

This business model can be successful for investors assuming management knows what they’re doing, but if they don’t it can be disastrous as we saw with Slater & Gordon Limited (ASX: SGH).

Another listed law firm in Shine Corporate Ltd (ASX: SHJ) has also struggled to deliver for shareholders as a public business.

However, business performance seems moderately strong for IPH with management today reporting Australia and New Zealand patent filings are up 3.6% against the prior corresponding period, with Asia showing “double digit revenue and EBITDA growth” against the prior corresponding period.

In addition the falling Australian dollar over the period has proven a significant tailwind as the group invoices for work in US dollars, but has a lot of its costs (staff wages, rent, etc) in Australian dollars. IPH noted how the weighted average for AUD / USD for the first four months of FY 2019 was 72.6 cents, compared to 78.7 cents for the first four months of FY 2018. Every 1 cent the USD rises equals another $1.1 million in service charges for IPH.

It also pays a trailing 4.3% yield based on 22.5 cents in dividends paid out over FY 2019.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended IPH Ltd. 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 Scott Phillips.

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