29 August 2017

Analyst
Sam Haddad 612 8224 2819 Xenith IP Group (XIP)
Authorisation Investing to support growth
TS Lim 612 8224 2810

Recommendation Transformational year, with a lot of moving parts

Buy (unchanged) XIP announced underlying FY17 EBITDA of $15.5m, 6.6% below our $16.6m estimate.
Price An increase in headcount costs in Shelston IP of $0.8m to support future growth was
the primary reason for the shortfall. A narrow miss from Griffith Hack and slightly larger
$1.95 than expected FX drag also contributed to the shortfall vs BPe. Key takeaways are:
Target (12 months)
Watermark exceeds FY17 EBITDA target, Griffith Hack marginally below:
$3.00 (previously $3.60) Watermark achieved annualised EBITDA of $3m, comfortably exceeding target of
$2.5m (therefore qualifying for a net earn-out payment of $5.5m). Griffith Hack
GICS Sector
achieved annualised EBITDA of $14.2m, 2% below target of $14.5m (and pcp).
Professional Services
Underlying Shelston IP business achieved solid top-line growth, although
offset by FX and additional employee costs: Shelston IP achieved constant
Expected Return currency professional fee revenue growth of 5%, although this was offset by FX
Capital growth 53.8% headwind of $0.8m and additional employee costs of $0.8m. Shelston IP finished
Dividend yield 4.9% FY17 with EBITDA of $8.7m, down 5% on pcp vs our anticipation of slight growth.
Total expected return 58.7%
Integration work progressing well: Investment of $1.4m to support integration
Company Data & Ratios
is in line with guidance. This is expected to increase to just over $2m in FY18 due
Enterprise value $194.6m
primarily to the annualised impact of corporate executive costs. Areas of progress
Market cap $178.2m
in XIPs integration plan include: integrated management team in place; payroll
Issued capital 91.4m
systems, financial reporting and insurances consolidated; communications links
Free float ~59%
established across business units; B2G functionality improvements commenced;
Avg. daily val. (52wk) $230k
and the rationalisation of overlapping property footprint has also commenced.
12 month price range $1.87 - $3.24
Target of $4m-6m pre-tax cost synergies by year 3 reaffirmed: We make
allowance for this in our forecasts, although note that execution risk remains.

Price Performance Earnings changes & Investment view Retain Buy, PT $3.00
(1m) (3m) (12m)
Price (A$) 2.17 2.20 3.23 We have allowed for the increased cost base in Shelston and the incremental increase
Absolute (%) -10.14 -11.36 -39.59
Rel market (%) -8.10 -9.47 -41.03 in investment to support integrations. We have also updated our model with our latest
currency forecasts ($A/$US of 77.5c in FY18). The net effect is NPATA downgrades of
15%/14%/9%, and our PT reduces from $3.60 to $3.00. Successful progress on XIPs
3-year integration plan should drive a re-rating of the stock. We retain our Buy rating.

Absolute Price Earnings Forecast

Jun Year end 2017a 2018e 2019e 2020e
$4.5
Sales (A$m) 85.0 134.0 140.9 145.6
$4.0
EBITDA (A$m) 15.5 24.2 26.7 30.0
$3.5
NPAT (reported) (A$m) 4.0 9.4 14.2 16.5
$3.0 NPATA (underlying) (A$m) 9.7 15.2 17.0 19.3
$2.5 EPS underlying (cps) 15.3 16.6 18.6 21.2
$2.0 EPS underlying growth (%) -7.5% 8.8% 11.7% 14.0%
$1.5 PER (on underlying EPS) (x) 12.8 11.7 10.5 9.2
$1.0 EV/EBITDA (x) 12.6 8.0 7.3 6.5
Nov Feb May Aug Nov Feb May Aug Dividend (ps) 5.0 9.5 13.9 15.9
15 16 16 16 16 17 17 17
Yield (%) 2.6% 4.9% 7.1% 8.1%
XIP S&P 300 Rebased Franking (%) 0% 100% 100% 100%
ROE (%) 12.5% 10.0% 10.6% 11.9%

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES

BELL POTTER SECURITIES LIMITED DISCLAIMER:

ABN 25 006 390 7721 THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 5 THAT FORMS PART OF IT. Page 1
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Xenith IP Group (XIP) 29 August 2017

EBITDA result 6.6% below our estimate

Headline result
XIP announced underlying FY17 EBITDA of $15.5m, 6.6% our $16.6m estimate. An
increase in headcount costs in Shelston IP of $0.8m to support future growth was the
primary reason for the shortfall. As anticipated, the result includes investment of $1.4m to
support the integration of Watermark (acquisition completed on 2 Nov 2016) and Griffith
Hack (acquisition completed on 2 Feb 2017). Underlying FY17 NPATA was $9.7m (vs BPe
$10.9m). A final ff dividend of 3.4cps was declared. We note XIPs dividend policy is
measured against reported NPATA rather than underlying NPATA.
Figure 1 - Actual vs expected summary
Pro Forma Actuals History Actual Expected Actual vs
1H16 2H16 FY16 1H17 2H17 FY17 FY17e Expected
Total Revenue 16.3 15.9 32.2 19.2 65.8 85.0 75.7 12.3%
% - Growth (pcp) 18.6% 164.1%

EBITDA 4.9 4.3 9.2 4.9 10.6 15.5 16.6 -6.6%

%-Margin 30.2% 26.8% 28.5% 25.5% 16.1% 18.2% 21.9% -3.7%
% - Growth (pcp) 67.1% 68.8%

Depn & Amort. -0.2 -0.1 -0.4 -0.4 -0.7 -1.1 -1.3 -15.1%

EBIT 4.7 4.1 8.8 4.5 9.9 14.4 15.3 -5.9%

%-Margin 28.8% 25.9% 27.4% 23.4% 15.0% 16.9% 20.2% -3.3%
% - Growth (pcp) 68.3% 63.6%

Net Interest -0.1 -0.1 -0.3 -0.1 -0.3 -0.4 0.4

Profit before Tax 4.6 4.0 8.5 4.4 9.6 14.0 15.7 -10.9%
Tax -1.4 -1.2 -2.6 -1.4 -2.9 -4.3 -4.8
Associates/Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Underlying NPAT 3.2 2.8 6.0 3.0 6.7 9.7 10.9 -11.1%
%-Margin 19.7% 17.5% 18.6% 15.6% 10.2% 11.4% 14.4% -3.0%
% - Growth (pcp) 71.3% 62.1%

Abnormals post tax 0.0 0.0 0.0 -1.5 -4.2 -5.7 -2.5

Reported NPAT 3.2 2.8 6.0 1.5 2.5 4.0 8.4 -52.9%

DPS (ps) 0.0 7.0 7.0 1.6 3.4 5.0 8.2 -3.2
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Earnings changes
We have allowed for the increased cost base in Shelston IP and the incremental increase
in investment to support integrations. We have also updated our model with our latest
currency forecasts ($A/$US of 77.5c in FY18). The net effect is NPATA downgrades of
15%/14%/9%, and our PT reduces from $3.60 to $3.00. Figure 2 provides a summary of
our forecast changes for FY18e-FY20e.
Figure 2 Summary of forecast changes
FY18e FY19e FY20e
Old New % Change Old New % Change Old New % Change
Revenue $m 134.6 134.0 -0.4% 139.6 140.9 1.0% 144.7 145.6 0.6%

EBITDA $m 29.2 24.2 -17.0% 32.6 26.7 -18.2% 34.9 30.0 -14.2%

EBITDA Margin % 21.7% 18.1% -3.6% 23.4% 18.9% -4.4% 24.1% 20.6% -3.6%

Underlying NPATA $m 18.0 15.2 -15.3% 19.7 17.0 -13.8% 21.3 19.3 -9.1%

Underlying EPS ps 19.7 16.6 -15.5% 21.6 18.6 -13.9% 23.3 21.2 -9.1%

DPS ps 14 10 -30.9% 17 14 -19.3% 19 16 -14.8%

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Xenith IP Group (XIP) 29 August 2017

Xenith IP Group
Company Description
Xenith IP Group (XIP) wholly owns the group of entities that comprise the Shelston IP,
Griffith Hack and Watermark businesses. XIP employs >440 staff (including ~175 IP
professionals), providing specialist IP services including identification, registration,
management, commercialisation and enforcement of IP rights to a broad range of clients.
Practice areas include: Patents and Designs (Patent work being XIPs major rev.
contributor); Trade Marks; and Transactions and Disputes (business structuring, IP
licences, legal advice & IP litigation).

Investment Strategy
We rate XIP Buy with a price target of $3.00. Integrating recently acquired businesses (all
to date made in Australia) is a key focus for XIP. In parallel, we believe XIP will likely look
to pursue expansion into South East Asia with the aim of providing a one-stop shop IP
service offer for the Asia-Pacific region. With a scalable platform at hand, this acquisitive
growth strategy provides opportunity to realise meaningful expansion to XIPs margins.

Valuation
Our 12-month valuation is $3.00 based on DCF. Key assumptions are: WACC of 10.4% &
a terminal growth rate of 3.5%.

Risk to Investment Thesis

Key downside risks to our valuation include (but are not limited to):
Acquisition risks: Poor due diligence or unsuccessful integration will impact earnings.
Regulatory reform risk: Amendments to current legislation or the introduction of new
legislation may cause material changes in patent or trademark flow volumes.
Competition risk: This will impact margins and may impinge on XIPs market share
Foreign exchange risk: A substantial proportion of XIPs revenue and cash flows are
generated in $US, while operating costs are mostly in $A. Any adverse FX movements
vs $A could have an adverse effect on XIPs financial performance and position.
Macro-economic risks: Adverse economic conditions may cause XIPs clients to defer
/cancel IP spend or exert pricing pressure.
Activity levels in key industry sectors: XIPs client base is spread across numerous
sectors. Adverse developments in key sectors may impact demand for XIPs services.
Personnel: The departure of any key personnel would likely have an adverse effect.
Brand and reputation risks: Anything that diminishes XIPs reputation or brand would
likely impact the level of enquiries, which in turn may reduce profitability and growth.
Concentration of shareholding: Major shareholding by XIP management may enable
them to exert significant influence over the outcome of matters relating to XIP.
Concentration may impact market liquidity and/or create stock overhang.
Patent filing management and IT systems: Any interruption, loss or delay of XIPs IT
facilities/tools, or loss of data/records, may impact XIP financially & with client relations.

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 Xenith IP Group Recommendation Buy
as at 29 August 2017 Price $1.95
Xenith IP Group (XIP) 29 August 2017
Target (12 months) $3.00

Table 1 - Financial summary

Jun Year end 2015 2016 2017 2018e 2019e 2020e Price $1.95
Profit & Loss (A$m) Recommendation Buy
Sales revenue 27.1 32.2 85.0 134.0 140.9 145.6 Diluted issued capital (m) 91.4
. . . Change 10.6% 18.6% 164.1% 57.6% 5.2% 3.3% Market cap ($m) 178.2
EBITDA 5.5 9.2 15.5 24.2 26.7 30.0 Target Price (A$ps) $ 3.00
. . . Change 80.1% 67.1% 68.8% 56.2% 10.2% 12.3%
Deprec. & amort. (0.3) (0.4) (1.1) (1.7) (2.0) (2.3) Jun Year end 2015 2016 2017 2018e 2019e 2020e
EBIT 5.2 8.8 14.4 22.5 24.6 27.7 Valuation Ratios
Net Interest (0.2) (0.3) (0.4) (0.7) (0.4) (0.1) Underlying EPS (ps) 9.7 16.5 15.3 16.6 18.6 21.2
Pre-tax profit 5.0 8.5 14.0 21.7 24.2 27.6 . . . % change 70.4% -7.5% 8.8% 11.7% 14.0%
Tax expense (1.5) (2.6) (4.3) (6.5) (7.3) (8.3) PE (on underlying EPS) (x) 20.1 11.8 12.8 11.7 10.5 9.2
. . . tax rate 30% 30% 31% 30% 30% 30% EV/EBITDA (x) 35.42 21.19 12.55 8.04 7.29 6.49
Associates - - - - - - EV/EBIT (x) 37.20 22.10 13.51 8.66 7.90 7.03
Minorities/Prefs - - - - - -
Underlying Net Profit 3.5 6.0 9.7 15.2 17.0 19.3 NTA ($ps) 0.06 0.13 (0.22) (0.11) (0.08) (0.04)
. . . Change 95.2% 71.3% 62.1% 56.8% 11.5% 14.0% P/NTA (x) 30.35 14.65 (8.69) (17.19) (24.59) (44.40)
Abs. & extras. - - (5.7) (5.8) (2.8) (2.8) Book Value ($ps) 0.06 0.13 1.62 1.73 1.76 1.80
Reported Profit 3.5 6.0 4.0 9.4 14.2 16.5 Price/Book (x) 30.23 14.62 1.21 1.13 1.11 1.08

Cashflow (A$m) DPS (ps) - 7.0 5.0 9.5 13.9 15.9

EBITDA 5.5 9.2 15.5 24.2 26.7 30.0 . . . % pay-out 0.0% 39.3% 41.9% 57.2% 75.0% 75.0%
Working capital changes (5.9) (0.3) (18.2) (1.5) (1.4) (0.7) Yield (%) 0.0% 3.6% 2.6% 4.9% 7.1% 8.1%
Net Interest Expense (0.2) (0.2) 0.2 (0.7) (0.4) (0.1) Franking (%) - 0% 0% 100% 100% 100%
Tax (1.5) - (1.3) (6.0) (7.0) (7.9)
Other operating items 4.3 (2.0) 14.1 0.9 3.2 0.7 Performance Ratios
Operating Cash Flow 2.2 6.6 10.3 16.9 21.1 22.1 Revenue growth (%) 10.6% 18.6% 164.1% 57.6% 5.2% 3.3%
Capex (0.4) (0.5) (1.8) (3.3) (3.5) (3.6) EBITDA growth (%) 80.1% 67.1% 68.8% 56.2% 10.2% 12.3%
Free Cash Flow 1.8 6.2 8.6 13.5 17.6 18.4 EBITDA/sales margin (%) 20.2% 28.5% 18.2% 18.1% 18.9% 20.6%
Acquisitions - - (88.4) (5.6) - - EBIT/sales margin (%) 19.3% 27.4% 16.9% 16.8% 17.5% 19.0%
Disposals 0.0 - - - - -
Dividends paid - (4.5) (3.5) (6.6) (11.3) (13.7) Gross cash conversion (%) 71.2% 74.1% 74.0% 97.7% 106.8% 100.2%
Other investing items - - (0.9) (3.0) - - Free cash-flow yield (%) 2.6% 8.7% 6.9% 7.6% 9.9% 10.4%
Equity - 3.8 72.3 11.8 - - ROE (%) n/a n/a 12.5% 10.0% 10.6% 11.9%
Debt increase/(reduction) - (2.6) 10.8 (10.1) (6.2) (4.7) ROIC (%) 222.6% 168.1% 16.7% 9.6% 10.6% 12.0%
Capex/Depn (x) 1.4 1.2 1.6 1.9 1.7 1.6
Balance Sheet (A$m)
Cash 2.2 4.9 3.6 3.6 3.6 4.6 Net interest cover (x) 21.7 34.3 36.0 30.8 62.4 494.6
Receivables 7.5 8.3 29.0 30.9 32.6 33.4 Net Debt/EBITDA (x) 0.5 n/a 1.1 0.3 0.0 n/a
Inventories & WIP 0.3 0.3 2.2 3.4 3.5 3.6 Net debt/equity (%) 132.7% -20.3% 11.5% 4.0% 0.0% -2.8%
Other current assets 0.3 0.3 1.6 1.6 1.6 1.6 Net debt/net debt + equity (%) 57.0% -25.5% 10.3% 3.8% 0.0% -2.9%
Current Assets 10.2 13.8 36.5 39.5 41.4 43.3
Receivables - - - - - - Half yearly (A$m) 2H15 1H16 2H16 1H17 2H17 1H18e
Assoc & investments - - - - - - Sales revenue 13.7 16.3 15.9 19.2 65.8 66.9
Fixed Assets 0.7 0.9 6.6 5.4 4.1 2.7 EBITDA 2.6 4.9 4.3 4.9 10.6 11.7
Intangibles 0.0 0.0 162.7 168.3 168.3 168.3 Deprec. & amort. (0.1) (0.2) (0.1) (0.4) (0.7) (0.8)
Other non-curr assets 1.4 1.4 0.2 0.2 0.2 0.2 EBIT 2.5 4.7 4.1 4.5 9.9 10.9
Non Current Assets 2.1 2.3 169.5 173.9 172.6 171.2 Interest expense (0.1) (0.1) (0.1) (0.1) (0.3) (0.4)
Total Assets 12.3 16.1 206.0 213.4 214.0 214.5 Pre-tax profit 2.4 4.6 4.0 4.4 9.6 10.4
Short term debt - 4.0 5.2 - - - Tax expense (0.7) (1.4) (1.2) (1.4) (2.9) (3.1)
Creditors 1.9 2.4 6.9 8.4 8.8 9.1 . . . tax rate 31% 30% 30% 32% 30% 30%
Provisions 1.4 3.3 10.4 11.0 11.4 11.7 Associates - - - - - -
Other curr liabilities - 0.3 3.0 3.0 3.0 3.0 Minorities - - - - - -
Current Liabilities 3.3 10.0 25.4 22.4 23.3 23.7 Underlying Net Profit 1.7 3.2 2.8 3.0 6.7 7.3
Long term debt 5.0 - 14.9 10.0 3.7 - Abs. & extras. - - - (1.5) (4.2) (3.9)
Creditors - - - - - - Reported Profit 1.7 3.2 2.8 1.5 2.5 3.4
Provisions 1.9 1.6 17.4 17.8 20.5 21.0
Other non curr liabilities - - 5.4 5.4 5.4 5.4
Non Current Liabilities 6.9 1.6 37.8 33.2 29.7 26.5
Total Liabilities 10.2 11.6 63.2 55.5 53.0 50.2
Net Assets 2.1 4.5 142.8 157.9 161.0 164.3
Share Capital 89.2 3.9 141.4 153.2 153.2 153.2
Reserves (85.2) (2.5) 0.9 0.9 0.9 0.9
Retained Earnings (1.9) 3.1 0.5 3.8 6.9 10.1
Shareholders Equity 2.1 4.5 142.8 157.9 161.0 164.3
Outside Equity Interests - - - - - -
Total Equity 2.1 4.5 142.8 157.9 161.0 164.3

Net debt/(cash) $m 2.8 (0.9) 16.4 6.3 0.1 (4.6)

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Xenith IP Group (XIP) 29 August 2017

Research Team
Recommendation structure
Staff Member Title/Sector Phone @bellpotter.com.au
Buy: Expect >15% total return on a TS Lim Head of Research 612 8224 2810 tslim
12 month view. For stocks regarded Industrials
as Speculative a return of >30% is Sam Haddad Industrials 612 8224 2819 shaddad
expected. Chris Savage Industrials 612 8224 2835 csavage
Hold: Expect total return between -5% Jonathan Snape Industrials 613 9235 1601 jsnape
and 15% on a 12 month view Tim Piper Industrials 612 8224 2825 tpiper
John Hester Healthcare 612 8224 2871 jhester
Sell: Expect <-5% total return on a Tanushree Jain Healthcare/Biotech 612 8224 2849 tnjain
12 month view Financials
TS Lim Banks/Regionals 612 8224 2810 tslim
Speculative Investments are either start-up
Lafitani Sotiriou Diversified Financials 613 9235 1668 lsotiriou
enterprises with nil or only prospective
Resources
operations or recently commenced
Peter Arden Resources 613 9235 1833 parden
operations with only forecast cash flows, or
David Coates Resources 612 8224 2887 dcoates
companies that have commenced
Duncan Hughes Resources 618 9326 7667 dhughes
operations or have been in operation for
Associates
some time but have only forecast cash
James Filius Associate Analyst 613 9235 1612 jfilius
flows and/or a stressed balance sheet.
Alexander McLean Associate Analyst 612 8224 2886 amclean
Such investments may carry an
exceptionally high level of capital risk and
volatility of returns.

Bell Potter Securities Limited

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