Incitec Pivot’s Growth Now “Drought Proof”

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By Chris Shaw

The drought continues to make headlines in Australia but Austock Securities suggests vertically integrated fertiliser company Incitec Pivot (IPL) is a drought proof growth story, the broker lifting its rating on the stock to Strong Buy from Buy.

The upgrade comes after the company reported a profit result of $82m, which was above the broker’s $77m forecast thanks to better than expected outcomes from both sales and margins.

In terms of highlights, the broker points out the company exceeded its weighted average cost of capital (WACC) by succeeding in cutting costs, with further gains from the cost cutting program expected in coming years.

Following the result the broker has lifted its profit forecasts in FY07 and FY08 by 11% to $114.3m and $127.4m, while in FY09 it has lifted its forecast by 19% to $144.8m, which equates to earnings per share of 228.7c, 254.9c and 289.7c. Thomson One Analytics shows median earnings per share estimates for the stock are 233c, 267c and 254c, so the broker’s adjusted forecasts look conservative at least through FY08.

It acknowledges as much, noting with cost savings this year being 50% higher than it had expected the risk remains to the upside in coming years, especially as a lower cost base for the group, especially in comparison to global competitors, gives it access to additional growth opportunities.

These include manufacturing and distribution opportunities in the Asian markets in particular, where the broker sees potential for as much as a 50% increase in capacity. Other markets with expansion potential in its view include Brunei, Western Australia, New Zealand and India.

While commodity prices remain a risk, the broker believes it has adopted a cautious approach by using as its base prices just 30% above the lows of the 1990s. Factoring in its higher earnings forecasts and some growth in coming years, the broker has lifted its valuation on the stock to $45.00 from $31.00, while its target price has increased to $44.71 from $31.18.

In contrast, the FNArena database shows an average price target of $31.05, while Thomson One shows a median price target of $31.38. Sentiment towards the stock remains broadly positive though, as the FNArena database shows the stock as being rated Buy three times compared to Neutral twice.

Incitec Pivot shares have traded weaker today despite a stronger overall market, as at 2.10pm the stock was down 31c at $31.01.

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