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Treasure Chest: Value Exposed In Incitec Pivot

Treasure Chest | Sep 05 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Brokers welcome Incitec Pivot's new focus on its explosives business, which will be supported by technology and expansion of the Moranbah plant.

-Opportunity to re-rate the stock on a single explosives focus
-Manufacturing excellence expected to provide additional $40-50m in earnings
-Value likely to come through higher explosives volumes and increased market share


By Eva Brocklehurst

Incitec Pivot ((IPL)) will focus on the earnings upside in its explosives business, which is expected to grow at higher rates than the market over the next 3-5 years. The company's confidence is supported by its technology and expansion of the Moranbah plant, where output will increase by a further 15% by FY22.

The company has also announced a geographic expansion into Chile. Large-scale capital expenditure is off the agenda and a US bond has been refinanced, which has removed some short-term risk.

At the investor briefing, brokers noted interest was also centred on the decision to review the fertiliser business. The review reflects a different priority being pursued for capital investment, as the company finds little aside from ammonia manufacturing that connects its fertiliser and explosives business.

Various options are being considered and the process is expected to take most of FY20. As fertiliser markets are at cyclical lows, there is a question about whether the timing is ideal. Still, Incitec Pivot is confident strategic buyers will be attracted to the business, although emphasised that, should a reasonable valuation not be obtained, a sale will not be pursued.

Credit Suisse believes the opportunity is straightforward: divest the volatile and structurally-weaker Australian fertiliser business and put capital into the explosives business. The broker considers the opportunity for re-rating the stock based on a single explosives focus is significant.


The company will concentrate on improving the reliability of its manufacturing and de-bottlenecking the Moranbah plant to create incremental capacity. Credit Suisse believes the 15% increase in output at Moranbah from de-bottlenecking should be a high-returning opportunity.

Assuming fertiliser prices hold, Citi expects earnings (EBIT) to strongly rebound in FY20 to $560m. Manufacturing excellence is expected to drive an additional $40-50m in earnings and, with a 15% expansion of Moranbah and organic growth project returns of 10-15%, the broker assesses normalised earnings could reach $630-650m.

All up, Macquarie calculates an effective opportunity to increase earnings by $100m, although notes, so far, the performance over FY19 appears disappointing. While the production performance needs to improve, the broker acknowledges there is a clear plan for the next few years.

Incitec Pivot is confident the Waggaman plant in Louisiana has strong profit potential, despite the operating issues encountered in FY19. The main competitive advantage is the plentiful low-cost US natural gas, the primary feedstock for ammonia production, of which the US is a net importer.

The company expects above-market growth in quarry & construction and improved share in base and precious metals. Thermal coal production is expected to experience a slowdown in the rate of decline over the next five years.


Technology, including the company's Delta E emulsion and the EZshot electronic detonator, is expected to provide a significant reduction in emissions, lowering mining costs and increasing safety.

UBS assesses shifting customer demands in both farming and mining are now dependent on technology and data and that carries unique considerations for capital deployment.

The company's blasting technology is based on developing products that are compatible with current mine plans. Hence, UBS believes Incitec Pivot can realise value through increased volumes, growth in market share and productivity-sharing arrangements with customers.

Macquarie points out this has been validated by the $25m technology alliance agreement between Dyno Nobel Asia-Pacific and BHP Group ((BHP)) in an effort to catch up with Orica's ((ORI)) lead in explosives technology.

While acknowledging the positive potential in explosives as mining demand normalises, UBS still believes market dynamics and re-pricing are likely to weigh on earnings growth and operating leverage. The stock is at 3-year lows and Citi reiterates a Buy rating, assessing the risk/reward has now turned favourable, given a probable upturn in seasonal fertiliser demand.

FNArena's database has four Buy ratings and three Hold. The consensus target is $3.41, suggesting 11.0% upside to the last share price.

See also Incitec Pivot Mulls Fertiliser Strategy on September 3 2019.

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