Incitec Pivot: Unlocking further value?

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
24 May 2022, 10:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Despite an ~8 week shutdown at Waggaman, Incitec Pivot (ASX:IPL) posted record 1H earnings driven by materially higher fertiliser prices, lower AUD, strong explosives volumes and solid manufacturing performance across its remaining plants.
  • The result was somewhat overshadowed by IPL’s demerger proposal.
  • Given IPL’s leverage to attractive industry fundamentals and the potential for further earnings upgrades if European gas prices remain high, we maintain an Add rating with a new price target of (login to view).

1H22 result – record earnings despite Waggaman rupture

Underlying EBIT rose 416% to A$568.2m and underlying NPAT was up 955% to A$384m. The result beat our forecast but was below consensus (1H is always difficult to forecast). An interim dividend of 10cps (fully franked) was declared.

Record high fertiliser prices underpin strong earnings growth

Strong 1H22 earnings growth largely reflected materially higher fertiliser prices, a slightly lower AUD, improved manufacturing performance, the strong uptake of its explosives technology and increased explosives volumes.

The 1H21 was severely impacted by three plant maintenance turnarounds and a number of outages.

In line with seasonal trends and due to higher fertiliser prices, IPL reported an operating cash outflow of A$79.4m (1H21 outflow was A$103.1m). The outflow is a timing issue and we expect IPL will generate strong cashflow for the full year.

Net debt to EBITDA was 1.0x compared to 2.1x in the pcp. Morgans forecasts IPL to end FY22 at 0.4x. This is well below IPL's target range of 2x or less.

We think capital management at year end is now likely on hold given the demerger and IPL's plans to have a conservative capital structure. However record earnings results in an attractive dividend yield of 7.5% in FY22.

Outlook comments were upbeat; demerger is announced

In line with seasonal trends and given the 1H Waggaman issues and the large profit on stock (>A$60m) which won’t be realised until the 2H, IPL’s earnings will be materially skewed to the 2H. North American Explosives is well placed for continued earnings growth across all sectors (particularly coal and Q&C) in 2H22.

In a tight global AN market, IPL is passing on inflationary cost pressures to customers. With Waggaman now operating at nameplate capacity, this business can fully take advantage of historically high ammonia prices. Additionally, insurance proceeds from an incident are expected to be received in 2H22.

Asia Pacific Explosives is on track for solid earnings growth reflecting more favourable contracts and supply arrangements, strong uptake of its technology and a recovery in the International earnings.

The Fertiliser business will continue to benefit from historically high fertiliser prices, a lower AUD and favourable seasonal outlook. Corporate costs are now expected to rise materially due to demerger costs.

IPL has announced that it intends to implement a demerger of its Fertilisers (Incitec Pivot Fertilisers) and Explosives (Dyno Nobel) businesses to create two separately listed companies on the ASX. The target completion date is during the first half of 2023, subject to required approvals and consents.

One-off costs are expected to be A$80-105m and ongoing-costs are expected to be approx. A$25-35m. A further update on the transaction is expected at IPL’s Investor Day in late August. IPL believes that the timing is now right for a demerger given the group will generate strong cashflow in FY22.

This means that the Fertiliser business can start its listed life with minimal debt. We note that IPL is likely demerging the businesses at a time when fertiliser prices are expected to fall from the current historically high levels resulting in the Fertiliser earnings declining materially over coming years.

A bid for the Fertiliser business can’t be ruled out. We expect that Explosives will be the materially larger business. It should trade on a higher multiple given its more stable earnings compared to Fertiliser, however it will include Waggaman. Therefore a discount to ORI is warranted.

We upgrade our forecasts

Due to a lower than expected AUD and higher explosives earnings, we have increased our FY22/23/24 EBIT forecasts by 0.5%/4.3%/3.3%. Our FY22 NPAT forecast has fallen 2.5% due to IPL’s higher tax guidance.

In FY23 and FY24, we forecast earnings to fall reflecting lower fertiliser prices. However, if European gas prices remain high, then there is upside to our fertiliser price assumptions.

Our DCF valuation has fallen to (login to view) due to higher tax and capex.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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