When I last covered IPD Group (ASX: IPG), I argued that the share price looked interesting at around $3.70, because I thought the market had overreacted to the disappointing earnings guidance for H1 FY 2025. I subsequently bought shares.
After that, Patrick Poke covered the IPD Group (ASX: IPG) H1 FY 2025 results which reported statutory EBIT of $20.2M and Statutory NPAT of $13.3M. If we had simply annualised those results, we would get FY 2025 EBIT of $40.4m and NPAT of $26.6m.
Over the last few days, the IPD Group (ASX: IPG) share price has declined for no apparent reason, on unusually high volume.
Today IPD Group came out with its guidance for FY 2025, which you can see below.
If we take the midpoint of the FY 2025 guidance range, we get EBIT of $38.9m. This implies EBIT of just $18.7m in H2 FY 2025, a 7.5% decline on H1 FY 2025. If we assume that EBIT converts to NPAT at the same rate as in H1 FY 2025, that implies NPAT of $25.6 million in FY 2025.
IPD Group has about 104 million shares on issue, so at the current IPD Group share price of $3.22, the market capitalisation is about $335 million. Based on my estimated NPAT of $25.6 million in FY 2025, that means IPD Group is trading on a FY 2025 P/E ratio of about 13.
While a P/E ratio of 13 does not demand much growth, it does demand at least some growth, and, well, when it comes to profit, IPD Group doesn’t seem to have any organic growth whatsoever right now. In fact, it’s going backwards.
Of course, the weakness of a contract-based business like IPD Group is that slight changes in business conditions can see revenue dry up, or else declining margins, as the company must bid more competitively for a smaller amount of work. In this case, it seems like some parts of the business are seeing revenue fall, while others are forced to accept lower margins.
In most circumstances, I would consider a P/E ratio of about 13 to be quite attractive, since I think over the longer term, demand for IPD Group’s electrical and cabling services will grow. Even though contractors tend to have somewhat lumpy earnings, I would have thought the long-term trajectory would be for growth.
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Am I The Patsy At The Poker Table?
This is the second time the IPD Group share price has declined in the weeks immediately preceding disappointing guidance. In the chart below, you can see how the share price fell from above $3.80, two weeks ago, to below $3.45 just prior to the guidance downgrade.
Similarly, we saw the IPD Group share price take a dive from $4.80 to about $4.20, prior to the release of the disappointing guidance last year.
I have no more information about who was selling prior to these downgrades, or what they knew, than you do.
Maybe it is just pure coincidence that the share price keeps falling before announcements that imply the company will miss analyst estimates. And even if it isn’t a coincidence, I do not mean to imply that anyone at IPD Group has done anything wrong; they could be just as much victims as anyone.
I have no way of knowing whether this share price action indicates anything untoward, but at the same time, it does erode my trust that I’m operating on a level playing field with everyone else.
Either way, prior to today’s announcement, the average of five broker analyst estimates on S&P CapIQ was for the company to make EBIT of about $41.5m in FY 2025, and now the midpoint of guidance is $38.9m, more than 6.2% short of estimates. So if someone had found out about the disappointing performance prior to this announcement, then they would have an incentive to sell.
This is important because when I last covered IPD Group, I wrote, “the return of optimism about the stock could easily bolster the multiple to around 20x earnings, where it has traded in the past.” However, after two disappointing guidance announcements, both preceded by unexplained share price declines, I’m pretty skeptical that the market will get that optimistic about IPD Group in the future.
IPD Group was in a position to benefit from a higher level of optimism in the past, because it had not damaged its reputation by falling short of analyst estimates, twice in a row. Now that it has, I think the level of optimism I can reasonably expect is much lower.
Therefore, I’m lowering my expectations for this stock. At current prices, I’m planning to hold on to my shares until after the release of the FY 2025 results. However, if the stock got back to about $3.70, 15x earnings, I’d look to sell, all else being equal.
While I’m certainly in no rush to sell my shares at current prices, suffice it to say that I’d prefer invest my capital in companies that don’t ever release disappointing guidance updates right after an unexplained share price decline. Once I can look past, but after the second time, I start to feel like the patsy at the poker table; and that is not who I want to be.
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Disclosure: The author of this article owns 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 276544).