Explosive Result For Incitec Pivot

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

Incitec Pivot’s FY21 earnings result has blown broker forecasts away, and with more to come the talk is now of capital management.

-Incitec Pivot's FY21 a substantial earnings beat
-Turnaround in a tough year
-Prices to remain supported
-Capital management on the cards

By Greg Peel

It was not the most favourable first half FY21 for fertiliser/explosives producer Incitec Pivot ((IPL)). Let us count the ways:

Heavy plant maintenance and turnaround schedule; lost production due to Hurricane Ida; unplanned manufacturing outages; and negative exchange rate movements.

But Incitec followed up with second half performance that has blown brokers away, leading to a substantial beat of consensus forecasts on full-year earnings. While there were several driving factors, strong ammonia and diammonium phosphate (DAP) prices were primary amongst them.

“It’s hard to imagine,” notes Credit Suisse, “how consensus forecasts missed the impact of fertiliser pricing on IPL’s FY21”.

Yet it’s not a flash in the pan. Brokers all point to stronger for longer fertiliser prices going forward on the back of strong demand meeting constrained supply.

Doesn't Get Much Better

The demand side is being driven by favourable weather conditions for agriculture across Incitec’s geographies, and not just in Australia. We need only cite yesterday’s earnings result and outlook from Elders ((ELD)), which among other things sells fertiliser across a range of geographies, which included an expectation of another 12-18 months of solid seasonal conditions.

On the supply side, nitrogen-based fertilisers (ammonia is compound of nitrogen and hydrogen and DAP a compound of nitrogen, hydrogen, phosphorus and oxygen) are derived from natural gas (methane) and the world, particularly the northern hemisphere, is suffering from a critical shortage of gas and resultant soaring prices.

Russian cutbacks to gas supply to Europe are part of the problem and China, too, has restricted exports. With investors and lenders now shying away from further fossil fuel development, there is little end in sight to gas shortages, particularly heading into the northern winter.

To this equation we add in full plant utilisation at Incitec’s Moranbah production facility (Queensland) after a troublesome period and the Waggaman plant (US) now back to full name plate capacity in the wake of Hurricane Ida.

Bearing in mind fertiliser is also used to produce explosives for the mining industry, brokers point to a reasonable likelihood of upside from product mix in Australia and an accelerating Quarry & Construction sector in the Americas. In the US, President Biden this morning signed off on the US$1.2trn bipartisan infrastructure stimulus bill so long in the making.

All of the above suggests that at least for the near term, Incitec Pivot will be a cash machine. The FY21 final dividend of 9.3c also exceeded broker expectations as did the level of debt reduction. This provides Incitec with balance sheet flexibility and, as all brokers suggests, the prospect of capital management ahead.

There are five Buy and two Hold or equivalent ratings for Incitec Pivot in the FNArena broker database. The consensus target has increased to $3.56 from $3.24 on a range of $3.14 from Credit Suisse (Neutral), who considers the benefit will be more in capital management than share price upside per se, and $4.30 from Morgan Stanley (Overweight).

Consensus dividend forecasts for FY22 suggest a 5.0% yield.

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