I am still catching up on all the newslfow from my portfolio during my recent vacation, and have finally reviewed a presentation from $IPG - the electrical distributor and services company, from 21 June. It wasn't price sensitive so I almost missed it.

Investor Presentation

My reason for sharing this, is that it does a good job of explaing how $IPG is positioned to supply the Datacentre and EV Charging Sectors, with slides 6 and 9 showing how the different business units serve data-centre and EV-charging clients, respectively.

While exposure to data centres and EV charging is certainly a part of my investment thesis, it is by no means the sole basis. $IPG is an electrical equipment distributor, with a portfolio of leading global brands (including some exclusive Australian distributorships), supported by a number of design and asset services offerings.

Importantly, they picked up CMI - another distributor that was stranded in what appears to be a wanna/nascent private equity business (supported by a capital raising) late last year, completing early this year - and they secured it for a very good price.

$IPG is founder-led and appears to be well-managed. Their SP went on a tear after IPO at the end of 2021. It has been range bound for the last year and - I speculate idly - whether this was part of the impetus to put out this presentation.

I'm very happy to be patient with this one. The FY24 guidance update provided in May was OK, and of course FY25 will have the full year contribution from CMI.

Notwithstanding the FY24 and FY25 inorganic uplift that will come from CMI, my reason for holding this business is that it is exposed to the broader re-wiring of the Australian economy, which goes far beyond EV's and datacentres. This multi-decadal macro tailwind will - in my estimation - expose it to a rate of growth at a mulitple of economic growth, and that's before any potential premium that might come from good management. Of course, it is too early for me to call it on whether management are good. The track record certainly looks impressive, going back before IPO.

I took an initial RL position of 4%, and depending on performance will consider adding more over the next 12 months. I wrote up its HY24 results in an earlier straw.

Valuation

I don't yet have any unique insights on $IPG. I think the three covering analysts are generous / bullish with an average TP of $5.58 and a very narrow range ($5.50 - $5.65) versus today's close of $4.81. I'll therefore be a tad more conservative and post an inital Strawman valuation of $5.40. I'll have a go at my own model, once I get to see a clean 6-months for the combination of IPG+CMI in Feb 2025.

I have commented before that its forward P/E of 27x is a bit spicey for a distributor, but I believe this is justifiable given its sector exposure. (If you do you own calculations rolling forward earning growth at 25-30% p.a., you'll probably end up agreeing with the analysts,)

@Strawman - it would be great to get CEO Michael Sainsbury along to a SM Meeting. Have you ever approached him before? (I can't recall if this has been requested before- apologies it if has.)

Disc: Held in RL and SM

Automation and electrical distributor $IPG announced their FY24 guidance, following 10 months' results.

The guidance for EBITDA ($39.0-$39.5m) and EBIT ($33.5-$34.0m) is bang on consensus - give or take - and in line with my model.

At midpoint, EBITDA growth is 42% and EBIT growth is 44% to pcp ... albeit with a significant inorganic element, which I'll discuss below.

From the Release

Michael Sainsbury, IPD Group Limited CEO, said: “It has been a transformative year for IPD with the completion of two strategic acquisitions, EX Engineering and CMI Operations. Merging our Addelec and Gemtek businesses has significantly enhanced our EV infrastructure team and we are capitalising on the growth in the market by securing a number of major projects during the year, including the electrification of Australia’s largest bus depot. We are excited by IPD’s evolution, with our extended product and service offering strengthening our overall value proposition to our existing customers and broadening our customer reach.” 

My Analysis

With the SP at a 29% discount to consensus, having been on a slide since shortly after HY results for no apparent reason, we might start to see the result close the gap.

FY24 will include only 5 months contribution of the material acquisition of CMI Operations, so the deal bakes in a favourable comparison for FY25. Now, while the market should discount that, it is worth remembering that $IPG picked up CMI Operations for a very good price. The $101m price tag (including a maximum $8.9m contingent payment) represented around a p/e of 10 and an EV/EBITDA of about 6. With good category synergies, and some valuable distributorship arrangements, the CMI Operations deal was a smart acquisition. That's before we even consider cost synergies.

A new holder of $IPG, I probably initiated my position prematurely, given the chart trend (always easy to say in hindsight, but I knew I was buying against the short term technicals), but today's result gives further confidence that the business is on track. We probably will have to wait until the FY25 result to see the value of the CMI Operations playing through - at this stage the metrics will just show 1+1=2.

$IPG is my way of playing the themes of 1) electrification of the economy and 2) investment in power infrastructure for datacentres.

This appears to be a well-run business, with smart acquisitions building out the product offering, bring leading brands under their umbrella, focusing on developing key capabilities (e.g. hazardous area equipment and related services), as well as continuing to build out the geographic footprint.

At a superficial glance, it looks expensive for a distributor at a p/e of 24 (FY24), however, when you dig deeper there is a lot to like about this distributor and the industries it supplies.

Disc: Held in RL and SM

Electrical products distributor and service provider $IPG announced their 1H results last week.

ASX Announcement

The company which was listed in late-2021 has seen its SP on a tear, heading into the results up 5x since listing. (Max kudos to the early StrawPeople who got onboard!)

$IPG has been on my watch list for 6-9 months, and I took a starting position in it on the pullback following results, which saw SP fall from a peak of $5.43 to close on Friday at $4.75, a handy correction of 14%.

I'll write next week in further detail as to why I am investing in $IPG, and will here just discuss the results. For those wanting more detail, there are broker reports by Bell Potter (TP $5.95) and Taylor Collison (TP $5.00 - free on the ASX broker report service.)

Now, as a word of caution on analyst views, my understanding is that Bell Potter was the lead Manager and Underwriter of the November capital raising. Their very high TP should be considered in that context.

Their 1H FY24 Highlights

• Record half-year revenues and earnings at the top end of the guidance range
• Revenue of $120.7 million representing 8.8% growth on pcp
• EBIT of $14.0 million representing 21.7% growth on pcp
• NPAT of $9.8 million representing 22.5% growth on pcp
• Fully franked interim dividend of 4.6 cents per share declared
• Strong balance sheet, with $142.7 million of net assets at period-end (net debt of $23.7 million as at 31 January 2024)
• Successful completion of the acquisition of EX Engineering Pty Ltd (“EX Engineering”)
• Announced acquisition of 100% of CMI Operations Limited (“CMI Operations”), a leading distributor of electrical cables and manufacturer & distributor of plug brands in Australia, from ASX-listed Excelsior Capital Limited (ASX:ECL)
• Raised $65.0 million of new equity capital in December 2023
• Post financial year-end: Entered into new $40 million debt facility to partially fund acquisition of CMI Operations and Completed acquisition of CMI Operations on 31 January 2024 

My Analysis

I was unable to attend the call and haven't looked at the transcript. So my analysis is a simple desktop exercise.

Expectations for $IPG were high. SP has been on a tear.

The 1H FY24 doesn't include the material CMI acquisition, although the EPS is lowered temporarily because the new shares were issued in late December, but the deal only closed in early 2H24. I'll pick through this in my preliminary valuation, which I'll post next week.

The table above shows why the market has reacted negatively and also why I think the results are not that bad.

Revenue growth at 8.8% is a softer result, compared to the trajectory over recent years (pre- and Post IPO). I think it is this softer result that perhaps triggered the SP correction. In the lead-up to results, the SP had run up hard, close to a stretching consensus, driven by Bell Potter's bullish view. However, despite low revenue growth (and short term revenue growth is not central to my investment thesis!), as we progress down the P&L, the results look pretty healthy.

%Gross Margin is a healthy 40%, up 2.4% from pcp.

EBITDA Margin is 13.7%, up 1.6%, drive by falling freight and distribution costs. (The marginal %EBITDA is actually 33% on a PCP comparison, which is not to be anchored on because the freight and distribution cost improvements cannot be sustained. I should also do the marginal analysis on the prior period.)

EBIT Margin was 12.0% up from 10.6%, and NPAT Margin was 7.9% up from 7.2%,

Note: My analysis is on the Statutory numbers and differs from the table above. I'm not prepared to consider the Underlying because M&A is an ongoing part of the business model, and core to my thesis, so I will not correct for the costs that arise from it.

These are pretty healthy numbers.

If we ignore the CMI acquisition, and assuming 2H and 1H are similar (there appears to be a slight historical weighting to 2H), then that would put $IPG on a annualised NPAT of $19,09. Backing out the new shares (because the result is not affected by the CMI acquistion), then by my calculation that puts $IPG on a p/e of 21.5 at its Friday close of $4.75.

This is a high p/e for a distributor. However, when I set out my investment thesis I explain why I am happy with this entry point.

I've had a quick look at cashflows, which were underwhelming, however movements in payables, receivables and inventories needs a deeper dive to make sense of it all, and therefore I am assuming the financials are a better guide. Cashflow and debt are not a concern based on a longer term historical view, so I'll leave this for another day.

My Key Takeways

In summary, there is no escaping that organic revenue growth was soft in the half, however the business was able to achieve good margin expansion, achieving what are pretty decent metrics for a 91% distributor / 9% services business.

Drivers of margin expansion have been moving more of the support activities of the individual businesses onto a share service model, consolidating their regional distribution networks, and favourable distribution costs in the PCP comparison.

From my selfish perspective, the down-trend in SP might continue for a while (gotta love technical traders), as I would like to increase my position here recognising I have paid more than I wanted to get started. More on that next week when I set out my investment thesis and valuation.

Disc: Held in RL and SM