Australia | Aug 30 2007
By Chris Shaw
Since listing last year Dyno Nobel (DXL) has been something of a disappointing performer, the shares range trading between $2.30 and $2.70 while competitors such as Incitec Pivot (IPL) enjoyed spectacular share price gains.
Part of the reason for the divergence in fortunes became apparent when Dyno reported earnings this month, the report revealing a blow-out in costs at its Moranbah ammonium nitrate plant that saw the share price drop briefly below $2.00.
Taking advantage of this Incitec Pivot has emerged with a stake of 13% in the company, brokers viewing the move as a precursor to a full bid. Incitec management has declared its interest in discussing further opportunities with its opposites at Dyno, which is market code for seeing if there is a price at which an agreed bid could be made.
This has sent the analysts covering the stock back to their spreadsheets to work out what sort of price would likely prove to be enough, in light of both the issues Dyno faces at the Moranbah project and the benefits Incitec stands to gain from acquiring the company.
The most obvious benefit according to JP Morgan is it would diversify Incitec Pivot’s earnings base as acquiring Dyno Nobel would give the company a significant position in the US market. UBS agrees, pointing out Dyno already has significant production and distribution infrastructure in that market.
According to ABN Amro there are few synergies available from any acquisition, but this doesn’t detract from the investment case for Incitec making a bid as its financial discipline should allow significant longer-term benefits to be generated.
The broker doesn’t see the company needing to pay much of a premium to acquire Dyno though, as it suggests a price of $2.45 would be attractive for Dyno shareholders given the capital expenditure requirements it faces at the Moranbah project.
Additionally it points out this increased capex means there is less scope for Dyno to grow via acquisitions, making the investment case less attractive. Add in the fact a $2.45 offer price would be competitive given recent deals in the sector and the market is trading below this level even after Incitec’s stake has been revealed and the broker suggests such a price would be enough.
JP Morgan thinks more will be needed, suggesting any offer would need to at least match its valuation of $2.62. The broker also points out there is scope for Incitec to lift earnings once it assumes control, so it could potentially pay up to $2.80-$3.00 and still generate a good return on the deal. UBS suggests at least $2.50 will be needed for any bid to be successful.
On the negative side for Dyno shareholders JP Morgan points out there is little scope for a counter bidder to emerge. Firstly, the fact Incitec already has a 13% stake makes it more difficult for any other party to achieve full control without at least paying a full price.
Secondly, it sees the most likely counter bidder as Wesfarmers (WES) but it suggests management over there has its hands full with the Coles (CGJ) bid and thus Wesfarmers is unlikely to be a player in this game.
Following news of Incitec’s acquisition of its stake the FNArena database shows an increase in the average target price for Dyno Nobel to $2.47 from $2.34, the company now being rated as Buy twice and Hold seven times compared to just one Buy rating prior to the announcement. Macquarie upgraded its rating and lifted its target to $2.65 from $2.13 to reflect the company now being “in play”.
Shares in Dyno Nobel today are slightly higher and at 12.45pm were up 4c at $2.43.