Australia | 10:05 AM
Weak cashflow, excessive debt and soft guidance sent Dyno Nobel shares tumbling on its FY26 result. With FY27 reflecting an ongoing turnaround, brokers look further ahead to strong demand thereafter.
- First Dyno Nobel result as an explosives pure-play
- FY26 earnings in line, cashflow, debt and FY27 guidance suggest caution
- Medium/longer term targets retained
- Energetics an underappreciated opportunity
By Greg Peel
The FY26 result for explosives production business Dyno Nobel ((DNL)) (September year-end) was a messy affair for analysts to assess, given the company was still operating a fertiliser business in FY25 before divesting of it at financial year-end.
Dyno Nobel announced the completion of the sale of the former Incitec Pivot fertiliser distribution business to Ridley Corp ((RIC)) on October 1 last year and later sold the land at its Gibson Island site to Goodman Group ((GMG)).
Dyno has been obliged to cover Gibson Island remediation costs post-sale.
The Phosphate Hill operation was sold in March this year to a private company. This left Dyno Nobel as a pure-play explosives business.
Post divestment, management has been engaged in a transformation strategy or “turnaround” as part of its pure-play shift.
Not with a Bang
Dyno Nobel’s second half FY26 result was its first as a pure-play. The result release was not well received. The stock fell -12.5% on the day.
Underlying profit of $330.9m was in line with guidance ($325-340m) and consensus ($328.0m). Explosives earnings of $485.1m, up 17.4% year on year or 11.9% re-based for the divestment, was at the guidance mid-point.
Headline growth was distorted by Fertilisers in the previous period but Morgans suggests the underlying Explosives result was solid.
From a regional perspective, the Explosives result was driven by North America (DNA), which saw USD earnings rise 28% (re-based) on broad-based growth across all end-markets and trading surplus ammonium nitrate into a tight market, Morgans explains.
Asia Pacific (DNAP) earnings rose 10% (re-based) on normalised production at the Moranbah plant and debottlenecking, recontracting benefits and strong electronics sales.
The Europe/Middle East/Africa (EMEA) and Latam division (DNEL) was the soft spot, with earnings falling -41%.
Despite group earnings meeting guidance, the major sources of disappointment were its cash flow, higher for longer debt and leverage, and management's guidance for FY27.
Cashflow of only $276.3m materially missed expectations and represented only a 35.5% cash conversion rate, partly Fertilisers related.
Net debt to earnings rose to 2.1x, at the higher end of Dyno’s target range of 1.75-2.25x. The resultant final dividend of 5cps (50% franked) compared to 9.5cps in FY25.
Weak Guide
Cashflow is expected to improve materially in FY27, but leverage is expected to remain at the top end of the range given higher capex and Fertilisers separation costs.
FY27 is a turnaround year for the Cheyenne facility in Wyoming and the Queensland Nitrates (QNP) joint venture. There is also maintenance due at Moranbah.
Guidance for underlying earnings of $515m–$555m in FY27 is below expectations. After deducting around -$25m of plant turnaround impacts at Cheyenne and QNP, earnings guidance is $490m–$530m, which Ord Minnett notes is approximately -5% below consensus at the mid-point.
Earnings are also expected to be 60% weighted towards the second half.
Not All Downbeat
Despite guidance missing expectations, Ord Minnett suggests management’s constructive tone on its core markets of US and Australia was encouraging.
In the US, management described market conditions as “tight”. In Australia, upcoming customer contract renewals provide potential pricing upside, while management observed the market was “very well balanced”.
There is also faith being placed in the ongoing expansion of the “energetics” business, which in simple terms refers to explosives for military purposes rather than mining/drilling.
Analysts were heartened that despite guidance disappointment, management reiterated its FY28 earnings target of $600m and FY31 earnings ambition of $800m, which excludes transformational M&A and EU energetics.
Management said it continues to assess further defence energetics opportunities across North America (beyond US$1bn of government-funded projects already secured) and Europe/NATO, given demand is expected to double by 2035.
Otherwise, underlying demand drivers remain intact, Macquarie suggests, with strong demand across both DNAP and DNA.
Macquarie expects DNA to show greater operating leverage in FY27 reflecting tight ammonium nitrate market conditions and the benefit from price (FY26 growth was mainly volume driven).
DNEL lagged in FY26 but growth should return in FY27, Macquarie believes, as supply chain costs normalise (post Middle East conflict) and with the ramp-up of recent contract wins (eg Brazil/Ghana).
Jarden notes cash conversion is expected to normalise back to 60%-70% levels in FY27, albeit the leverage starting point commences towards the top end of the 1.75x to 2.25x range.
The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE
If you already had your free trial, why not join as a paying subscriber? CLICK HERE