A Leverage Opportunity In Incitec Pivot

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By Chris Shaw

Last week both ABN Amro and Credit Suisse lifted their price targets and earnings forecasts for Incitec Pivot (IPL) to account for strong fertiliser prices and improved seasonal conditions, both of which put earnings risk firmly to the upside.

While this offers fundamental support, the warrants team at ABN Amro are equally positive from a technical viewpoint, suggesting the positive outlook for earnings means the stock is likely to consolidate just below its all-time highs of around $45 per share before pushing through this level and on to its target of $50.00.

Such a move would generate a solid return of more than 10%, but the broker points out those looking for a little extra bang for their buck would do well to consider the self-funding instalment warrant it offers over the stock.

The warrant, code IPLSZB, offers one-to-one conversion and a delta of 1.0, meaning each 1c move in the share price generates the same sized move in the warrant. It allows investors to gain the same exposure for a lower entry price, with dividends over the course of the warrant’s life (it expires in June 2016) to be used to pay off the balance owing rather than flowing through to the warrant holder. As a result, the instrument is more suitable for those interested in capital gains rather than income.

Incitec Pivot shares are higher today, as at 11.40am the stock was up 50c at $45.00.

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