Delek Group published its second-quarter report. Two lines in it depart from the expected, and both say something about the structure of the company.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 1,036 | |
| Gross profit | 488 | 47.1% |
| Operating profit | 650 | 62.7% |
| Pre-tax profit | 501 | 48.4% |
| Net profit | 523 | 50.5% |
| Attributable to shareholders | 314 | |
| Non-controlling interests | 209 | |
| Basic earnings per share | NIS 1.70 | |
| Balance sheet total | 55,599 | |
| Shareholders' equity | 15,956 |
The First Anomaly: Operating Profit Exceeds Gross Profit
NIS 650 million of operating profit, on gross profit of NIS 488 million. A gap of 162 million.
At a holding company this almost always has the same source: equity earnings from associated companies. A company holding a significant stake in another company, without full control, records its share of that company's earnings as a separate line - and that line sits above the operating line.
In other words, part of Delek Group's operating profit does not come from activity it operates itself, but from its holdings in other companies.
And the Second Anomaly: Net Profit Exceeds Pre-Tax Profit
NIS 501 million before tax. NIS 523 million after.
That is, the tax line contributed about NIS 22 million instead of subtracting. This is a tax benefit, not an expense.
And what is worth understanding in a line like this.
A tax benefit is not money coming in. It is an accounting entry - the recognition of a tax asset, or the reversal of a provision made in the past.
In a group made up of many companies this is possible even in a profitable quarter: one company pays tax, another recognises a tax asset, and the net figure can come out positive.
So net profit here is not a good measure of activity. The figure that describes the activity is operating profit, NIS 650 million - and that too, as noted, includes equity earnings.
And the Line That Matters to the Shareholder
Of net profit of NIS 523 million, NIS 314 million is attributable to Delek Group shareholders.
NIS 209 million - which is 40% - is attributable to non-controlling interests.
And this is the phenomenon we saw this week at Alony-Hetz as well, and which is worth recognising at any holding company.
A company holding control of a subsidiary consolidates 100% of its results in its own accounts - even if it holds 55% or 60% of it. It then separates the minority's share into a separate line.
The meaning for the shareholder: the line relevant to them is not "net profit" but "attributable to the company's shareholders."
Here the gap is 40% - that is, four out of every ten shekels the group earned belong to partners in the subsidiaries.
This is not a defect. It is a structure, and it requires reading the right line.
The Balance Sheet
| Balance sheet total | NIS 55,599 million |
| Shareholders' equity | NIS 15,956 million |
| Leverage ratio | 3.5 to one |
NIS 55.6 billion of assets - and at an energy holding company, the lion's share of those are the assets of the held companies, including those of which only part belongs to Delek's shareholders.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a reminder that at a holding company you have to read three lines, not one.
"Net profit of NIS 523 million" sounds excellent. But NIS 209 million of it belongs to somebody else, and NIS 22 million of it is a tax benefit rather than activity. What is left to a Delek Group shareholder from the activity is an entirely different number.
And what interests me about this structure is that it recurs this week: Alony-Hetz, Delek Group - two holding companies in which the gap between consolidated profit and the shareholder's profit runs to tens of percent. At Alony-Hetz it even flipped the sign.
This is not by chance a phenomenon of holding companies alone - it is a direct consequence of fully consolidating companies that are not wholly owned. And the more branched the group, the larger the gap.
And what I would check in the full report is the breakdown: which part of the NIS 650 million of operating profit is activity the company operates, and which part is equity earnings. The difference between the two is the difference between a business and a portfolio of holdings.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
