Pinned straw:
The market has reacted very negatively to IPD Group’s Earnings guidance today, down over 11%. Is this an overreaction, or is it warranted?
1H25 EBIT guidance is $19.2 million to $19.8 million, mid-point $19.5 million. Assuming a 30% tax rate, that’s $13.6 million net profit before interest. Assuming 2H is similar that’s about $25 million before interest for FY25 which is a miss on analyst expectations of c. $30 million.
CEO, Michael Sainsbury, said margins will be impacted in 1HFY25.
What do others think?
Not held.
Based on unaudited results for the 4 months ending October 2024, and management forecasts for November and December, the Company provides the following earnings guidance range for 1H25:
The Company also notes that:
• Revenue for 1H25 is forecast to exceed the pcp (Pro Forma);
• Average monthly orders received has grown 39% in Jul-Oct 2024 Vs 1H24 (Pro Forma); and
• Order Backlog (as at end October 2024) has grown to $93.1m, a 50% increase on the pcp (Pro Forma).
Michael Sainsbury, IPD Group Limited CEO, said: “We are pleased to remain on track to deliver another half of revenue growth in a challenging environment. Amidst the wider macroeconomic challenges in the commercial construction sector, we have seen our order book transition from daily trade to larger and more complex orders, which typically have longer lead times and less certainty around delivery timing. This has resulted in a proportion of orders that would previously have already become invoiced Revenue now sitting in our Order Backlog. We have made additional investments into our operating cost base to generate and deliver these additional orders, which will impact margins for 1HFY25. Our operating cost base however is well placed to service future growth. We remain excited by IPD’s ongoing evolution and the continued improvements to our overall value proposition and look forward to providing more details around today’s update at the Company’s AGM on Tuesday, 26 November 2024.”
@Rick and @Jimmy there's no doubt the results are soft, but I also see this as a buying opportunity - and I'll explain why.
First, the numbers - against my model and guidance
We start with an ambiguous statement about revenue growth - is the growth referred to on a pro forma basis or against FY24?
Assumptions
- For now, I am going to complete my analysis on the basis that revenue in FY25 is flat to pro forma revenue in FY24, or $350.4m
- I'll also assume H2 and H1 are flat (generally, underlying growth and acquisitions, has meant that's not been true with H2>H1)
- I'll also take midpoint of guidance.
- Interest cost $2.5m
- Tax rate 30%
FY25 numbers based on these assumptions (margins in brackets)
- EBITDA: $45.6 (13.0% vs. 13.7% FY24 reported)
- EBIT: $39.0 (11.1% vs. 11.7% FY24 reported)
- NPAT: $25.6 (7.7% vs. 7.3% FY24 reported)
- EPS $0.25 vs. $0.22 FY24 reported
The FY24 Proforma Margins are: EBITDA (14.2%), EBIT (12.2%) and NPAT (8.4%) - so you can see the "margin compression" Michael is talking about.
Valuation
If I run a series of EPS growth scenarios for the next 3 years, discounted back to end of FY25, I get the following table for EOFY25 valuations:
Note: this is in the context of 3-yr EPS of 44% and 2-year of 30%.
In July, I put a tentative valuation on $IPG of $5.40. That was predicated on a better start for the IPG+CMI combination than we are seeing from today's guidance, but with a less rosey view on the P/E than based on history. (16 - 26; average about 20)
Some of my above assumptions are a bit conservative. So, for example, if Michael Sainsbury is to be taken at his word, then the larger-job-longer-duration order book should see a reversal of margin compression as well as revenue growth in H2.
What helps me square the circle is that with all his talk about margin compression, given the EBIT and EBITDA provided for H1, that means Revenue can't be that bad, otherwise its hard to get low revenue and compressed margins, and still hit the guidance values offered for EBIT and EBITDA.
On the range of values above, eps growth of 10% and a P/E of 16, would be a thesis breaker, and I believe $IPG will do a lot better than that. This is because we are currently in a cyclical low (see next section).
In fact, even with today's soggy guidance, I still see a valuation range that is comfortably $4.00 - $6.00. I can't tie it down more than that because not only do we have the muddy waters of the CMI acquisition, but now there's the added narrative of the changing structure of work from "daily trade to larger more complex orders". I'll really need to see the detail of the 1H results, and hopefully some guidance for the FY25, in February. For now, I'll update my SM valuation from $5.40 to $5.00 ($4.00-$6.00). Hence, I'm buying at $3.68,
I'll listen to the AGM tomorrow, to hear if there is some elaboration.
Why 1H FY25 should be expected to be soft
We know the commercial sector is soft, confirmed by the recent Bell Potter note "channel check".
I've also included some macro chart on Building Capex and Plant and Machinery Capex at the bottom of this strawm and for which we get the next numbers for Q3 on Thursday. You'd assume these won't be great the deeper we go into the restrictive period for interest rates. $IPG's spend is driven by commercial and industrial capex, after all.
So, What's Going on with the SP Reaction?
I think the SP response is an over-reaction. And my story goes like this.
First, I think some of the analysts have gotten a bit too excited about $IPG. Just look at the upgrades below. The most recent upgrades were not justified on a value basis (in my view), because a lot of the growth has been inorganic. I've also noticed several brokers pumping $IPG to investors over the last 6-12 months, and they've been using these inflationed valuations to do this [Average $5.89 ($5.76, $6.20; n=4].
Despite being pumped by these brokers, we've seen the SP trading sideways, and I hypothsise that there has been a rotation on the share register, with holders from IPO who have done 4-5x being replaced by new investors who (like me) buy the "electrification of everything" narrative.
I believe the fundamentals of the soft FY25 have already been captured in the 20% SP decline since the FY24 results and, that today's open, was probably a fair reflection of value, taking a bearish near term outlook.
So, why the 12% step-down (at time of writing) - I think we're maybe shaking out more IPO holders now rueing that they didn't get out at $5, added to low conviction newbies, and now add to that the momentum investors as $IPG is flashing "SELL" on pretty much all the technical indicators.
So, for me, that's a BUY, which is what I've been doing.
Disc: Held in RL (even more) and SM
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Some Macro Charts - Data Update for Q3 on Thursday!
@Karmast I am a bit annoyed that I didn't check, but questions have to be submitted via registry 48 hours before the meeting. There is no live virtual Q&A or voting!
Your questions are all good ones. However, these kinds of governance shortcomings are what we see all too often in small caps; and $IPD is still definitely a small cap with only a few years being listed. So while I note and agree with the need for improvement, I don't ascribe any underhand motivation to it.
Insider Transactions
The ones I am most focused on are Sainbury (CEO) and Yousseff (Strategy/BD) Executive Directors. Although NED Moffat warrants a mention because since IPO his % holding has reduced by 67%, albeit its value has increased significantly.
Here's the history:
The small adds for the ED's are just the Performance Rights converting to Ordinary Shares.
Moffatt, Sainsbury and Yousseff all sold down a chunk recently. As you say, about 10% for Yousseff and 25% for Sainsbury. Moffats was about 40% and his second major sale since IPO.
The circumstances around the TIMING of each sale are - I consider - each unique in their own way.
Moffatt's selldown occurred after he might conceivably have seen the 1Q Performance Report. We'd need to know the date of the Board Meeting. (I am not making an allegation here, I am just speculating given the dates.) His disclosed reason is vague. If I was the suspicious type, I might smell a rat.
In the case of Yousseff, his selldown was too early in September to have had much visibility of the half. (Still, you never know. He was the numbers guy!)
In the case of Sainsbury, his selldown was ahead of FY24 Result, and as a result he missed out on the >10% SP appreciation on that result. I don't begrduge him a nice house. I'd want one too in his position. And the timing is fine.
In conclusion, I am going to continue to monitor Director transactions, however, I don't see anything amiss here, and with the 2 Executive Directors still holding 11% of SOI, I consider their interests remain well-aligned with mine.
As for Moffatt, he has less skin in the game, and given how much his modest holding has appreciated since IPO, then perhaps he is reasonable to manage his concentration risk. Not for me to judge really.
What I Am Focused On
I am more focused on the story behind the guidance.
You get one shot at downgrading due to a shift in the mix of work. That shift is consistent with some of the broader strategic moves of the last two years, that moves them more into design/project work that then drives supply purchases, and which has a longer sales cycle. That said, you need the macro-overlay to justify why it should create such a revenue flat-spot. But such an overlay clearly exists in the macro-economic data.
So the narrative of the guidance is a line in the sand. It is a clear mark against which we can test the narrative in H1 and again at FY. It is actually the kind of proof point that I like management to provide, because their trustworthiness can be gauged (in part) by what is said in the future.
So far, I haven't detected anything inconsistent in what's been said before. However, there has been lots of M&A to provide a smokescreen. I am hoping for a quite period to see the organic performance. Do I think I'll get the chance? Maybe not, with Yousseff moving out of the CFO role and into the Strategic Business Development role.
Overall, there are risks and unknowns here - but on balance I am giving management the benefit of the doubt.
I'll "see you" online at the AGM, although I'll have to duck out if they're not done in time for my appointment in the @Strawman Star Chamber!