article 3 months old

Incitec Pivot Heads To FY19 Quietly Confident

Australia | Sep 10 2018

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

Incitec Pivot is confident in the FY19 outlook for fertiliser prices while demand for explosives in quarry & construction is robust.

-Earnings from Waggaman ammonia and explosives to drive growth
-Oversupply in ammonium nitrate expected to ease by FY20
-Lower distribution margins in fertiliser stemming from east coast drought

 

By Eva Brocklehurst

Incitec Pivot ((IPL)) is enjoying strong momentum heading into FY19 amid firming prices for fertiliser and strong demand for explosives. Management discussed plant reliability and enhanced fertiliser profitability at its latest investor briefing.

Earnings from the Waggaman ammonia plant in Louisiana and improved demand for explosives are expected to drive growth going forward. The company is more confident regarding its view on fertiliser prices across diammonium phosphate, urea and ammonia. Meanwhile, quarry & construction demand is strong.

Morgan Stanley suggests any expectations for major change in strategic settings from the investor briefing were misplaced and the company is on a path of cautious and considered deployment of capital.

The broker believes the explosives business has the first call on growth capital in order to expand into new end markets and/or adjacent geographies. Positioning in the fertiliser value chain is also being enhanced. Beyond the growth agenda, debt reduction is now a priority and Morgan Stanley welcomes this approach, given the cyclical nature of the company's businesses.

Incitec Pivot appears to have no appetite to expand upstream explosive manufacturing, with the exception of Moranbah. An expansion of Moranbah's ammonia plant is still a possibility but would require a substantial capital injection, Credit Suisse observes. Meanwhile, taking a manufacturing position in Western Australia has been discounted.

From a growth perspective the company is intent on maximising and expanding low-capital intensity positions downstream that also leverage higher value-added product/technology. Credit Suisse envisages new markets are within the company's scope, while noting no further expansion of the US ammonia business is on the horizon.

Technology/Innovation

Macquarie agrees technology/innovation is the main focus for explosives and there is also opportunity to better market capabilities. The company is a small player in a large US industrial chemical market with a preference for less cyclical expansion, although no further large greenfield investments are planned.

Macquarie expects the company will retain its volumes from Moranbah, with an update expected in May at the first half result regarding contract outcomes. Moreover, ammonium nitrate prices are headed in the right direction, in the broker's view. Moranbah had a record production year in FY18 and another record year is targeted for FY19.

Citi asserts that any expansion of Moranbah is a premature consideration. Given the oversupply in ammonium nitrate markets, the broker is also not sure whether the company's technology at this point would provide an additional income stream or merely help retain existing contracts.

Still, demand conditions are supportive and the broker expects a rebalancing of the surplus by FY20. Morgan Stanley expects excess ammonium nitrate supply to preclude a sustained up-cycle in prices over the next 3-5 years.

Fertiliser

Despite drought conditions and the uncertainty about the long-term viability of Gibson Island, the company appears upbeat about fertilisers, reiterating a commitment to the business. Incitec Pivot has flagged lower distribution margins from the fertilisers business because of drought conditions and volume from the Phosphate Hill plant has been reduced to 840,000 tonnes.

Yet the decision to forego divesting the Australian fertiliser business is a missed opportunity, Credit Suisse believes, although the option may gain more traction if Gibson Island closes. The broker suspects the cost of gas will continue to point to a closure of Gibson Island.

Credit Suisse upgrades the stock to Neutral from Underperform, believing earnings will be swept higher by a tightening of fertiliser prices over the medium term and a gradual tightening of the explosives market as well.

Fertiliser prices have materially outperformed Morgan Stanley's expectations and spot prices imply material upside for FY19 operating earnings (EBIT). In the latter half of 2019 the broker retains a watching brief for how fertiliser prices evolve. Ammonium nitrate and fertiliser price leverage is likely to prove elusive for the company and the broker struggles to find valuation support above current levels.

FNArena's database shows three Buy ratings and four Hold for Incitec Pivot. The consensus target is $4.04, suggesting 6.3% upside to the last share price. Targets range from $3.45 (Morgans, yet to update on the briefing) to $4.55 (Deutsche Bank).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

IPL

For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED