Ashdod Refinery published its second-quarter report. Before any number in it, one thing has to be said: it is not in shekels.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
And this is not a technical footnote, it is a precondition for reading the report.
Ashdod Refinery reports in dollars. Its functional currency is not the shekel, because both the feedstock it buys and the products it sells are priced in that currency on the world market.
The practical meaning: a figure like "1,091 million" in this report is not directly comparable to a similarly sized figure in the accounts of an Israeli company reporting in shekels. The difference is a factor of more than three.
This is a very easy mistake to make when reading several Israeli reports on the same day, and it distorts any ratio that mixes two companies. Every figure in this piece is denominated in dollars and marked as such.
The Quarter
| $ millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 1,091 | |
| Gross profit | 109 | 10.0% |
| Operating profit | 102 | 9.3% |
| Pre-tax profit | 77 | 7.1% |
| Net profit | 69 | 6.3% |
| Basic earnings per share | $5.50 | |
| Balance sheet total | 1,738 | |
| Shareholders' equity | 501 |
What Happens Between Gross and Operating - and Barely Does
$109 million of gross profit, and $102 million of operating profit. A gap of just $7 million.
And this is worth pausing on, because it differs fundamentally from what we saw this week in retail and in services.
94% of Ashdod Refinery's gross profit survives to the operating line.
For comparison, in the same week: Castro kept 27% of its gross margin, and Matrix and One Technologies about 52% and 54%.
And the explanation is structural. A refinery is a single facility. It has no chain of stores, no distributed sales network, and no headcount that grows with turnover. Almost all of its cost sits in the feedstock, which is to say above the gross line.
The practical conclusion: in a business like this, the gross margin is almost the whole story. What happens after it is relatively negligible - and that is the exact opposite of retail, where the gross margin is only a starting point.
And the Margin Itself: 10.0%
This is the number that decides a refiner's quarter, and it comes from the spread between the price of crude and the prices of refined products.
That spread is called the refining margin, and it is not controlled by the company. It is set in the world market, and it can move sharply between quarters according to supply and demand for fuels against supply and demand for crude.
So a strong quarter at a refiner does not necessarily indicate an operational improvement, and a weak quarter does not necessarily indicate a problem.
The Tax Rate: 10.4%
$77 million before tax, $69 million after - that is, tax of $8 million, an effective rate of 10.4%.
Israel's corporate tax rate is 23%. The rate here is less than half of it.
And what can be said, and what cannot.
What can: had the rate been 23%, net profit would have been about $59 million rather than $69 - a gap of roughly $10 million in a single quarter.
And what cannot: the structured quarterly filing does not detail the tax reconciliation, so I do not know the source of the gap. A low rate can arise from accumulated losses of prior years, from benefits under the capital investment encouragement law, or from movement in deferred taxes.
That is the difference between knowing the figure is low and knowing why. The first I know from the report; the second has to be sought in the full accounts, and if I did not find it, I say so.
The Balance Sheet
| Balance sheet total | $1,738 million |
| Shareholders' equity | $501 million |
| Leverage ratio | 3.5 to one |
A profit of $69 million in a quarter on equity of $501 million is a return of 13.8% in a single quarter.
And I deliberately do not multiply that by four. In a sector where profit derives from a refining margin that swings sharply, multiplying one quarter by four produces a number that sounds precise and describes nothing.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a good example of how far context matters more than the figure.
A gross margin of 10.0% sounds low - until you understand that at a refinery it is almost the entire profit, and that 94% of it survives to the operating line. Castro, with a gross margin of 63.6%, reaches the operating line with 17.4%. Ashdod, with 10.0%, reaches it with 9.3%. Two businesses, two entirely opposite structures.
And what I hold as a caution is the tax rate. 10.4% is a figure that flatters a quarter, and if it stems from accumulated losses or from a benefit that applies for a period - it will disappear at some point, and net profit will look different without anything in the business changing.
So the number I will follow here is not net profit but operating profit, which is the only one that describes the business itself without the tax layer.
And what I would look for in the full accounts is two things: the source of the tax benefit, and the actual refining margin in the quarter against the quarters before it. Without the second, there is no way to know whether 10.0% is a good quarter or an average one.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
