IPD Group (ASX: IPG) is a roll-up of companies focussed on the distribution of electrical products and installation of electricity networks. As these pages have previously outlined:
“IPD has been operating in Australia for over seventy years. It began as a division of English Electric, a company which specialised in the manufacturing of fuse links, switchgear, and overhead busbars. In 2005, management acquired the industrial products distribution business in a management buyout, forming IPD. Through organic growth and acquisitions, IPD has expanded its operations to nine locations across six states. IPD commenced outsourced operations in Colombo, Sri Lanka in 2010 to provide support services to its Australian operations, before establishing its own Sri Lankan subsidiary in 2019. The company then listed in December 2021. In 2022 it acquired Gemtrek which provides electric vehicle charging services.”
Since then, IPD has acquired GX Engineering in July 2023 and raised $65m at a price of $3.93 per share to purchase CMI Operations, which was completed at the end of January 2024.
IPD Group FY 2024 Results Were Good
When IPD Group released its FY 2024 results in August, CEO Michael Sainsbury said:
“From a headline perspective, it’s fair to say that the continued growth exceeded the top end of our guidance that we put out in May. At a revenue level, we’re reporting $290.4 million at a revenue level, which is up 28% on the prior comparative period, at EBITDA level, $40.1 million up 44.8% on the prior comparative period. At an EBIT level, $34.3 million, up 46.6% on the prior comparative period. And net profit of $23.3 million, up 44.7% on the prior comparative period. One of the great results over the last 12 months, and we talk about the best interest of our shareholders, has been the underlying earnings per share at $0.242, up 30.1% on the prior comparative period, and I’m sure all of you would be pleased to hear that.“
As you can see below, cash conversion was much improved in the second half, improving on one of the weakest aspects of the H1 FY 2024 result.
After those results, the IPD Group share price increased from around $4.65 to highs above $5. The three brokers on S&P Capital IQ all submitted optimistic EBIT estimates for FY 2025. Shaws guessed $47.4 million, Bell Potter guessed $46.4 million, and MA Moelis guessed $45.7 million.
IPD Group Directors Then Sold Shares
After the strong FY 2024 results, two IPD Group directors took the opportunity to sell shares on the open market. Mohamed Yoosuff sold 1 million shares at $5.10 and Andrew Moffat sold 192,446 shares at just over $4.82.
IPD Group Share Price Crashes On FY 2025 Guidance
Yesterday, IPD Group announced that H1 FY 2025 revenue would grow (as predicted) but that Based on unaudited results for the 4 months ending October 2024, and management forecasts for November and December H1 2025 EBIT would be between $19.2m and $19.8m. If we take the low end of that guidance and double it, we get full year EBIT of $38.4 million, 16% below the relatively conservative Moelis estimate.
In the few days preceding this announcement, the IPD Group share price fell from around $4.70 to around $4.20. Then when the announcement came out it fell from $4.20 to $3.70.
I personally consider it quite likely the market was pricing in this information even before it was publicly announced, though I can’t be sure of it. Either way, the share price currently sits about 20% below where it was prior to this guidance, which is roughly similar to the shortfall of guidance compared to what the analyst estimates were, after the result. You could argue the share price decline is justified on that basis.
Why IPD Group (ASX: IPG) Looks Good Now
IPD Group has about 104 million shares on issue. Analysts are forecasting around $2.5m in interest expenses for FY 2025, but to be safe we could assume $3m.
Based on annualising the first half EBIT (and taking the low end of guidance), that would give us FY 2025 profit before tax of $35.4 million.
If we applied a hypothetical tax rate of 30%, we get about $24.8 million in net profit after tax. Divide that by the 104 million shares, and we get earnings per share of about 23.8 cents.
Based on the current share price of $3.69, that implies the company is trading on about 15.5 times my estimate of FY 2025 underlying earnings per share, keeping in mind acquisition costs could impact the statutory result.
Now, 15.5 times earnings does imply some growth, but based on the management commentary in yesterday’s downgrade, that growth is extremely likely to arise. Growth is not expected to arrive in a smooth way, since demand for large projects can be a bit lumpy. However, the team at IPD Group endlessly go on about the various tailwinds driving demand: renewable energy, electric cars, and electrification generally (versus gas).
If there is any truth to these claims, then it would not be unreasonable to expect growth in excess of 5% per annum, over the longer term, at an absolute minimum.
Even growth of only 5% would see the company making over 30c per share in 5 years, which would imply a P/E ratio of about 12, if the price remained the same. Of course, it is also possible that growth will average more like 10% per annum. In that case, I would expect returns to come in a bit closer to 12% per annum, once you take into account the dividend (and assuming the multiple stays the same).
And of course, the return of optimism about the stock could easily bolster the multiple to around 20x earnings, where it has traded in the past. In that case — and this is what I’m most interested in — you could probably get decent returns in a year or two.
The scenario I am envisaging is that one could buy shares in IPD Group at around the opening price today, currently about $3.70. Then, you might benefit from some immediate sentiment improvement at the AGM today, which is being held at 11am. If not, that wouldn’t matter. The hope would be that by the time the company reports its FY 2025 results, it has a slightly stronger second half, and gives a more positive outlook.
That might mean earnings per share closer to 24.5 cents for FY 2025, and a P/E ratio (based on FY 2025 earnings) of more like 17.5. That would give us an IPD Group share price around $4.20, which is a premium of about 13.5% over the current price. A P/E ratio of 20 would give us a share price back up around $4.90; and that’s about as much as I’d dare hope for in the next 18 months.
As we have previously outlined, IPD Group seems like a cyclical business, and as a result it may be hard to predict earnings, even for management.
After this disappointing guidance, the company won’t satisfy my criteria for an official recommendation, since I don’t like to back board members who sell shares prior to releasing disappointing guidance. Due to this sequence of events, I can’t see myself considering it to be a “top idea” any time soon. But that doesn’t mean it has no merit.
In fact, I do think that the stock looks interesting for a medium-term trade, starting at around the last traded price.
After writing this article, I can’t buy shares for at least 48 hours. But if I still find the share price attractive at that point, I currently intend to make a small investment in the company. If any new information at the AGM makes me lose interest in the stock, I’ll update this article below. If I don’t update the article, it means nothing changed my view.
And that is why I think IPD Group stock looks interesting right now!
Disclosure: The author of this article does not own shares in IPD Group (ASX: IPG) and will not trade IPG shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).