Strong Agri Prices Rescue Incitec Pivot

This story features INCITEC PIVOT LIMITED. For more info SHARE ANALYSIS: IPL

Just as well fertiliser prices are booming as Incitec Pivot is again plagued by production problems at Waggaman

-Waggaman concerns offset by favourable agri pricing
-Unclear how plant utilisation will pan out
-Uncertainty may inhibit re-rating of the share price
 

By Eva Brocklehurst

The Waggaman ammonia plant in Louisiana continues to cause headaches for Incitec Pivot ((IPL)), and the timing is unfortunate because the ammonia price has been particularly strong in recent months.

Still, as fertiliser prices have increased significantly throughout the first quarter of 2021, for most brokers this more than offsets the earnings impact of the setback at Waggaman.

Ord Minnett expects an ammonia price of US$375/t in the second half of FY21, and this adds $20m to earnings estimates. Moreover, marking to market the Australian dollar update and anticipating stronger earnings in Asia-Pacific, this provides the rest of the offset.

UBS upgrades its estimates for diammonium phosphate/ammonia prices because of a stronger-than-expected recovery in soft commodities amid favourable agricultural conditions. These revisions support upgrades to earnings estimates of 29% and 10% for FY21 and FY22, respectively.

The broker believes the share price of Incitec Pivot and its earnings are significantly affected by the diammonium phosphate (DAP) and ammonia prices, and both are recovering after a lengthy period of underperforming. For DAP, UBS lifts its forecasts for FY21 and FY22 to US$465/t and US$400/t, respectively. Ammonia forecasts are raised to US$398/t and US$400/t, respectively, for those years as well.

Global DAP prices have rebounded recently to hit US$592/t, the highest realised price since 2012. This has been driven by an absence of Moroccan and Russian imports forcing the US to rely on higher-cost producers from Australia and Saudi Arabia.

Macquarie expects this will provide opportunities for Incitec Pivot to sustainably export some of its production to the US and win a potential price premium. The DAP capacity at Phosphate Hill is 1mt and typically one half of this is sold domestically and the other half exported.

Sharp increases in crop prices, such as wheat and soy, have also raised farmers' acreage plantings, supporting demand for fertilisers. Morgan Stanley asserts fertiliser prices are the critical earnings input for Incitec Pivot and a supportive fertiliser environment outweighs any short-term concerns about ammonium nitrate volumes.

Waggaman

The company has experienced further delays in turning around the plant associated with the ammonia cooler, having previously expected it would be up and running by mid March. The re-start will now take place in mid April, after a failure of equipment when ramping up production.

Analysis has indicated poor workmanship on the original cooler and the further delay in the start-up expected to result in an adverse impact on earnings (EBIT) of -$36m in FY21. Additionally, while repairs to the cooler will be conducted, it now requires replacement in FY22/23, with an outage of up to three weeks expected.

Credit Suisse does not include this outage in its forecasts because of the uncertainty around the timing and, given the number of issues that have arisen, it is unclear just how plant utilisation in the next 12-24 months will pan out.

Ord Minnett lowers production estimates for the plant over the forecast horizon to capture the risk that reliability remains below the company's target. Morgan Stanley, too, decreases forecasts to allow for extended outages but, having increased ammonia price forecasts, assesses this more than offsets the impact.

UBS also points out FY21 is a heavy year of turnarounds for Incitec Pivot as the Moranbah ammonium nitrate plant is coming off line in the second half. The company has completed two out of the four turnarounds at its plants in FY21 with Moranbah scheduled for May.

The cost of the repairs at Waggaman is now expected to be $80m, depreciated over four years. Despite the problems, Incitec Pivot maintains a target of realising $40-50m in manufacturing efficiencies in FY23 and improving plant reliability to a 95% target.

Waggaman has run at 85% average utilisation since 2016 and the turnaround was designed to close the gap to nameplate. Macquarie now assumes utilisation going forward will be 90%.

Morgans suggests the number of outages incurred in recent years may inhibit a re-rating in the share price that was underway because of higher fertiliser prices, yet believes the company will be a beneficiary of favourable fertiliser prices while it has solid exposure to an economic recovery through its explosives business.

Macquarie also notes Incitec Pivot expects post-pandemic earnings growth in Dyno Americas in FY21 as the US quarry business returns to normal and mines re-start internationally.

On FNArena's database there are five Buy ratings and two Hold. The consensus target is $3.02, suggesting 9.4% upside to the last share price.

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