IPD Group’s Future Remains Electrifying

This story features IPD GROUP LIMITED. For more info SHARE ANALYSIS: IPG

IPD Group’s FY24 earnings beat management guidance and analysts anticipate upside from organic growth and further M&A activity.

-FY24 earnings for IPD Group exceeded guidance
-Double market growth rates, cash flows surprise
-Conservative FY25 data centre guidance
-Rising EV uptake will benefit, notes Shaw

By Mark Woodruff 

Following a beat for earnings against management’s guidance at FY24 results, IPD Group ((IPG)) continues to target growth at double the rate of its markets and is hot on the trail of near-term acquisition targets.

Providing one of the most attractive ways to play electrification across multiple end markets, the stock remains a top pick among Bell Potter’s Industrials coverage.

Shaw and Partners is similarly upbeat noting the outlook for the group’s markets remains buoyant, driven by the transition to renewable energy, increasing demand from data centres and their energy requirements, a growing number of electric vehicle (EV) chargers, and a supportive legislative environment.

Management’s track record includes ongoing operating improvements, consistent dividend payments, and multiple guidance upgrades after listing on the ASX in 2022, points out the analyst.

Underlying earnings of $40.1m in FY24 marked a 45% increase on FY23, while cash flow was labeled a major standout, with cash conversion of 88%, up from 51% in FY23.

As a result, the company exited FY24 with core net debt of $8.8m compared to Shaw’s $17.8m forecast, which should help fund future organic and acquisition-based growth.

The outlook is already supported by a record order book, notes Bell Potter, following year-on-year organic earnings growth of between 8-10% in FY24.

The group operates in segments with few direct competitors and supplies category leading electrical brands, often on an exclusive basis within Australia, highlights Bell Potter.

Inflation largely acts as a tailwind for such distributors with strong value propositions and efficient cost controls, points out the broker, as these companies typically have pricing power to pass through input costs to customers.

Operating nine distribution centres and servicing over 4,200 customers nationally, IPD Group is an Australian distributor of electrical equipment and industrial digital technologies.

The company supplies products used in buildings, infrastructure and process sectors which help to reduce energy use and/or reliance on the transmission network.

Diverse offerings cater to various sectors including power generation, commercial, hospitality, infrastructure, and sports and leisure facilities.

Growing Data Centres

While Commercial Construction (37%) and Infrastructure still account for 37% and 23% of group revenue, respectively, Shaw and Partners highlights Data Centres now comprise 12% after revenues doubled to around $35m in FY24.

For FY25, Taylor Collison expects data centre industry capex will increase faster than the 25% growth management is guiding for this segment, which appears to be conservatively based upon work already on hand.

Given the group’s strong data centre customer relationships, and a history of repeat wins, this broker predicts future contract awards will potentially drive consensus earnings upgrades.

Acquisitions

Management successfully completed acquisitions of EX Engineering in July 2023 and CMI Operations at the end of January this year.

Offsetting weaker commercial markets, data centre and wastewater markets were strong in FY24, highlights Taylor Collison, with core IPD and Ex Engineering growing by double-digits, whilst CMI Operations (five-month benefit) had like-for-like EBIT declines. It’s felt issues at CMI are mostly temporary.

Moelis agress and suggests CMI offers a step change in IPD Group’s earnings despite the disappointing second half performance. The analysts highlight CMI’s complementary product suite and revenue synergies, and predicts CMI will contribute margin expansion to IPD Group’s core business.

As a result of recent acquisitions, the group’s contribution from electrical manufacturer ABB dropped to 32% from 44%.

IPD Group is the preferred distributor for ABB”s low voltage power distribution and control products in Australia. The company has a master distribution agreement with ABB’s Motion business for the supply and sale of ABB HVAC drives in Australia. HVAC refers heating, ventilation, and air conditioning systems.

The FY24 gross margin fell by -114bps to 37.1% due to the impact of acquisitions, though came in 2bps ahead of Shaw’s forecast.

The final fully franked dividend of 6.2 cents exceeded the 5.9 cents forecast by Bell Potter.

Opportunities and outlook

Any improvement in macroeconomic conditions, along with a rising EV uptake would provide positive impetus for IPD Group, suggests Shaw.

Bell Potter forecasts significant near-term growth prospects from data centres, EV charging, and via distribution of Elsteel’s Techno Modular switchboard systems.

This broker notes the group recently secured certain product categories with ABB, which has market share in Australia of 5-10%.

This level pales in comparison to the 20-30% market share in Europe due to the customer service deficiencies of IPD Group’s predecessor, thereby presenting management with a large turnaround opportunity, in the analyst’s view.

Further, the Addelec-Gemtek EV charging business is set to scale materially in FY25 as key projects ramp.

In Taylor Collison’s view, sources of potential upside in FY25 are better-than-expected data centre sales and any earnings-accretive M&A activity.

Even after a strong post-result share price rally, this broker still believes investors can make money should double-digit EPS growth continue.

The Board will provide an update on the first quarter trading performance at the AGM on November 26.

Following FY24 results, the average target of daily monitored brokers -Buy-rated Shaw and Partners and Bell Potter- increased to $5.90 from $5.50, suggesting more than 15.50% upside ex-dividends.

Outside of daily monitoring, Taylor Collison and Moelis have ratings of Speculative Buy and Buy, respectively, and an average target of $5.78.

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