Dalia Energy published its second-quarter report. It demonstrates how a healthy operating profit shrinks tenfold on the way to the bottom line.
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The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 1,314.1 | |
| Gross profit | 247.3 | 18.8% |
| Operating profit | 154.3 | 11.7% |
| Pre-tax profit | 57.1 | 4.3% |
| Net profit | 15.8 | 1.2% |
| Balance sheet total | 9,153.3 | |
| Shareholders' equity | 2,666.3 |
Two Lines That Shrink It Tenfold
From NIS 154.3 million of operating profit to NIS 15.8 million of net profit - that is a fall of almost 90%, in two stages.
The first: financing took 63.0%
NIS 97.2 million was taken out between the operating line and the pre-tax line.
And the explanation is in the balance sheet: NIS 9,153.3 million of assets on equity of NIS 2,666.3 million - a ratio of 3.4 to one.
A power station is a multi-billion investment built over years and yielding over decades, and it is funded with long-term debt. The interest on it falls below the operating line, and here it takes almost two thirds of operating profit.
And that is not unusual in the sector. Nofar Energy filed the same day, and financing took 121.9% of its operating profit - that is, more than all of it.
And the second: tax took 72.3%
NIS 57.1 million before tax, NIS 15.8 million after. Tax took NIS 41.3 million.
And that is a rate three times Israel's corporate rate of 23%.
And as I wrote today at Novolog too, on a relatively small base a high tax rate is usually a matter of how the charge is composed rather than a real rate.
The tax charge in the accounts is not a percentage of accounting profit. It includes current tax, movements in deferred taxes and adjustments for prior years - and those do not move in proportion to the quarter's profit.
The structured quarterly filing does not detail the tax reconciliation, so I do not assert its source here.
What can be said: had the rate been 23%, net profit would have been about NIS 44.0 million rather than 15.8 - a gap of roughly NIS 28 million in a single quarter.
Margin Survival: 62%
| Gross margin | 18.8% |
| Operating margin | 11.7% |
| Survival | about 62% |
And that is an entirely reasonable figure in power generation: once the facility is built, the costs above the operating line are mainly fuel and maintenance, and head office is small relative to turnover.
So this quarter's problem is not in the operations. It is in what sits beneath them.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report demonstrates something that recurred today across several infrastructure companies: the business and the balance sheet tell two different stories.
An 11.7% operating margin on turnover of NIS 1.31 billion is sound operation. The power station runs, the fuel is bought, the electricity is sold.
And what separates that from the shareholder is NIS 9.2 billion of assets that somebody funded - and the interest on them takes 63% of the profit.
And that is neither unusual nor a failure. It is the structure of all infrastructure: you build with debt, you repay over decades, and in the early years financing is heavy. What changes over time is that the debt is repaid and the profit is released.
And what I will follow is the ratio between operating profit and financing expenses. Today it is 154.3 against 97.2 - that is, 1.6 to one. That is enough, and it is not a lot.
And what I would look for in the full accounts is the source of the tax rate. 72.3% is a figure that, if it recurs, takes about NIS 28 million a quarter - and if it is one-off, the next quarter will look entirely different without anything at the station changing.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
