IPD Group (ASX: IPG) has delivered a set of half-year results that, at first glance, look like a dream for investors. Revenue? Up 46.6% year-on-year. EBITDA and EBIT? Also up by a similar amount. Even the dividend has grown a hefty 39% year-on-year.
But dig a little deeper, and you’ll see a more complex picture. While acquisitions have supercharged the top line, organic growth has slowed to a crawl, and margin pressure is eating away at profitability. In other words, while IPD Group is bigger than it was a year ago, things are not as peachy as they look on the surface.
Statutory vs. Pro Forma: The Discrepancy That Matters
A quick glance at the statutory numbers shows an outstanding result for the half year.
- Statutory Revenue: $176.9M (+46.6% YoY)
- Statutory EBIT: $20.2M (+47.4% YoY)
- Statutory NPAT: $13.3M (+40% YoY)
But the pro-forma numbers paint a less flattering picture.
- Pro Forma Revenue: $176.9M (+2.3% YoY)
- Pro Forma EBIT: $20.2M (-5.6% YoY)
- Pro Forma NPAT: $14.2M (-4.7% YoY)
That’s quite a difference.
You might notice, however, that the actual numbers for this half-year are fairly similar between statutory and pro forma. It’s the comparables from last year where the real gap lies – this offers a big clue as to what’s happening.
The key here is the acquisition of CMI Operations, which became part of the Group effective 31 January 2024. CMI’s revenues and earnings are included in the pro forma numbers, but not in the statutory numbers.
Jason Boschetti, CFO, explained that CMI’s lower gross profit margins diluted results in this first half. However, operating expenses as a percentage of revenue decreased, resulting in EBIT margins that were flat.
It’s still early days for the integration of CMI, and even EX Engineering, so it will be important to keep an eye on revenue growth and margins in the future to assess whether:
- The company can achieve organic revenue growth, and
- Whether margins can be improved on the acquired businesses, bringing them closer to the existing IPD Group business.
A Tale of Four Segments: Growth, Drag, Stability, and Electrification
Data Centres – The Star Performer
The standout performer in the IPD Group portfolio is its data centres division, which continues to benefit from the explosion in AI, cloud computing, and digital transformation. This segment makes up ~15% of revenue and is growing rapidly, supported by:
- Strong demand for power distribution and automation solutions
- Expansion of switchboard testing capabilities
- A growing order backlog, suggesting further upside
Given its overall contribution to revenues though, it may be some time before it’s the primary driver of growth.
Investor takeaway: If there’s one segment that deserves a bullish outlook, it’s this one.
Commercial Construction – The Achilles’ Heel
The problem child in the lineup is commercial construction, its largest revenue contributor (~33% of total revenue). This segment is struggling due to high interest rates and sluggish demand for new developments.
Revenue for CMI was down 3.3% YoY, and margins are lower than the IPD Group legacy business. Management suggested that larger, longer sales cycle projects were increasing the sales backlog but had not yet converted to revenue.
The recent RBA rate cut (25bps) could offer some relief if it results in improvements in commercial construction, but it’s unlikely to be a game-changer.
Investor takeaway: If commercial construction remains weak, it could weigh on IPG’s overall growth trajectory.
Industrial & Infrastructure – The Steady Performer
Industrial and infrastructure, which includes mining, water/wastewater, and hazardous area solutions, continues to provide stable but unspectacular growth (~22% of revenue).
- Less cyclical than commercial construction, offering resilience
- Strong investment in essential infrastructure, particularly in water and energy
- Growth in hazardous area solutions (EX Engineering) from oil & gas and industrial manufacturing
Investor takeaway: Solid, dependable, but not the primary growth engine.
EV Charging – A Rapid Growth Opportunity
Another exciting avenue for growth is the rise of EV charging stations, as Australia accelerates its transition towards electric vehicles. IPG is well-positioned to benefit from increasing infrastructure investment in this space.
- Expanding demand for charging station power solutions
- Government incentives supporting EV infrastructure growth
- A high-margin, fast-growing market segment that complements IPG’s existing portfolio
Management emphasised that while this business was currently in the ‘installation phase’, the long term opportunity here is in building out a service programme to support the hardware in future.
In particular, Michael Sainsbury, CEO, pointed to the Kingsgrove Bus Depot project, which after several delays, has now started work. Sainsbury said he expects “a significant amount of revenue in the second half of the year attached to the Kingsgrove Bus Depot.”
Investor takeaway: While still a smaller part of IPG’s revenue mix, EV charging could emerge as a significant long-term driver of growth, making this a sector to watch.
H2 Outlook: What to Watch
Historically, revenue and earnings have been higher in the second half than the first. If this trend continues, we could see earnings surprises to the upside.
Additionally, while a single 25bps rate cut won’t revive commercial construction, any further easing could be a tailwind.
Looking at analyst expectations, many haven’t yet factored in IPG’s strong first half numbers. If the second half follows historical trends, we may see upward earnings revisions.
On the earnings call, management commented that they see opportunity to achieve “as good, if not better results in the second half of the year”. While this was not formal guidance, it does demonstrate that management has confidence in a strong performance in the second half.
There was also discussion of their $92.7 million order backlog, which management commented:
“At the headline level, our revenue is $176.9 million for 6 months, which averages out to around $30 million per month. So, yeah, it’s sort of in that 3 to 4 months’ worth of backlog range.”
Management also mentioned that they’re planning a 3-4% price rise coming in March, about half of which should flow through in this financial year, but most of which should be reflected next financial year.
See our past coverage of IPD Group here.
Is IPG a ‘Buy’?
If we conservatively assume that second half earnings just match the first half, that would give us EPS of 25.8c for the full year, resulting in an FY25 PE ratio of 17x at the current price of $4.39. This is slightly below the median analyst forecast (per Morningstar) of 26.2c. Given the first half results exceeded management guidance, and the factors outlined above, this is lower than what I would expect.
If we assume the second half is 5% above the first half, that brings us down to 16.6x, or with 10% growth, that’s more like 16.2x. While not outrageously cheap, this seems about fair to me given the growth opportunities for the business. There’s definite long-term potential in data centres, industrial automation, and electrification. But investors should be cautious of the margin squeeze and commercial construction headwinds.
If we saw a pullback below $4.00, it would make IPG a more attractive buy.
Final Thoughts
IPG is executing well on its growth strategy, but headwinds in construction are weighing on earnings. If you’re bullish on data centres, automation, and electrification, it might be a solid long-term hold – but watch those margins closely. But if commercial construction stabilises and H2 follows historical trends, there could be upside surprises in earnings.
For now, I’ll continue to be a happy holder of the stock, but won’t be adding to my position. A dip below $4.00 would provide a better margin of safety, and would likely see me increasing my holdings.
Disclosure: The author of this article owns shares in IPG and will not trade shares for at least 2 days 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).
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