Australia | Mar 05 2007
By Chris Shaw
Last week Credit Suisse upgraded its target price on Incitec Pivot (IPL) to $44.00 from $38.40 on the back of higher earnings estimates resulting from strong fertiliser prices. The broker noted both its old and new earnings forecasts were well above market consensus, so it was confident the rest of the market would need to play catch up and upgrade estimates.
The broker has been proven correct as ABN Amro has followed its lead and lifted both its earnings forecasts and price target, the broker maintaining its Buy rating compared to the Hold rating of Credit Suisse.
On ABN Amro’s revised estimates the company should record a profit this year of $155.4m, which is up 24.7% from its previous forecast, while in FY08 it has increased its profit forecast by 22.6% to $184.2m. This puts it broadly in line with Credit Suisse, who is forecasting earnings of $157.5m and $181.4m, up 111% and 1.3% respectively.
Both brokers point out the strength in fertiliser prices is a combination of strong demand and a tight market, Credit Suisse noting there has been some curtailment of production of late and some restocking by buyers. There is also an earnings leverage story in play, as both brokers note each US$10 increase in ammonium phosphate prices results in a $13m impact on earnings, while a US$10 change in Urea prices has a $4.5m impact.
This suggests some further upside earnings risk, as Credit Suisse points out prices for ammonium phosphates are currently 25% above the level it used in its forecasts and 14% higher for Urea.
While ABN cautions against assuming prices will be maintained at current levels over the full year it suggests seasonal factors are also supportive, as recent rainfall improves the chances of a strong planting season in the key April-June period. It also notes the company remains in acquisition mode, so any major purchase could generate additional earnings upside.
ABN Amro’s new target price is $50.00, the broker pointing out the stock remains cheap when compared to its international peers. It estimates the average P/E (price to earnings) ratio for such companies globally is around 16.5 times, while at current levels Incitec is trading at about 14.1 times earnings in FY07.
The broker’s target compares to Credit Suisse’s target of $44.00, which was raised from $38.40. As a result, the FNArena database shows an average price target of $43.89, up from $41.47 last week and well above the median price target according to Thomson One Analytics of $38.40. The database shows the stock is rated as Buy three times and Hold three times.
Shares in Incitec Pivot are weaker today in line with the broader market, as at 12.00pm the stock was down 69c at $43.89.