Uncertainty Awaits Incitec’s Pivot

This story features INCITEC PIVOT LIMITED. For more info SHARE ANALYSIS: IPL

Incitec Pivot’s strategic renewal set to hit a FY25 hiccup unless management can pull off the separation of its fertiliser business.

-Incitec Pivot’s FY24 results beat expectations
-Explosives yet again identified as the highlight
-The on again, off again separation of fertilisers
-Most analysts reduce forecasts, though outlook looks better
-Re-rating catalyst for Incitec Pivot’s valuation 

By Danielle Ecuyer

FY24 results down but better than expected

The latest FY24 results from Incitec Pivot ((IPL)) ticked many boxes for investors; nevertheless, brokers described the financials in a range of terms from “dynamic,” according to Ord Minnett, to a “strong beat” and “better-than-expected”, with Citi using the more constrained adjective “solid”. RBC Capital didn’t mince words with “messy.”

On balance, brokers generally agree Australia’s largest supplier of fertilisers, and the largest supplier of explosives/services in North America and second largest globally, achieved a higher-than-forecast FY24 earnings result, beating consensus estimates.

While the result was dominated by one off write-downs, underlying EBIT and net profit after tax came in 9.9% and 13.5% ahead of expectation.. EBIT ex-one offs of $580m was still -34% below the $880m achieved in FY23. Net profit after tax fell -31% on FY23 mainly due to business unit closures and production issues at Phosphate Hill.

Explosives were the highlight; Macquarie pointed to Dyno Nobel Asia Pacific which generated 36% earnings growth.

Citi explains the division achieved $45m in growth over the previous corresponding period from re-contracted customer outcomes in Australia. Morgans estimates a $64m benefit from the transformation program, which relates to the re-contracting boost in Asia Pacific versus management’s guidance of around $50m.

Most of the customer contract book has now been renewed.

Growth in Metals customers from higher activity levels helped boost revenue by $22m over the prior year. Technology growth contributed another $11m on FY23 due to robust electronics and differentiated energy emulsion volumes, Citi explains.

Morgans assessed Dyno Nobel North America reported stronger-than-guidance results, with 13% growth in EBIT, above the analyst’s forecast. The result included a US$3m asset sale and an increase in the EBIT margin to 13.3% from 11.7% due to a better sales mix of metals versus coal.

A 10-month inclusion of the new Waggaman off-take agreement added US$4m.

Macquarie views Dyno Nobel’s transformation as progressing well. The FY24 results confirmed management achieved 21% of the targeted $300m in transformation benefits, with another 40%-50% expected in FY25.

FY24 fertiliser results were impacted by the closure of Gibson Island and manufacturing issues at Phosphate Hill in 1H24, although the run rate increased to 950kt p.a. in 2H24.

Incitec achieved a record EBIT of $60m from distribution, a rise of 32% on FY23, supported by higher average rainfall on the Australian east coast, driving strong customer demand, Citi detailed.

Cash flow conversion was a weak spot in the results, down by -59% year-on-year due to lower earnings and higher total workforce costs.

Macquarie notes net debt of $652m exceeded the broker’s forecast of $499m, reflecting the lower cash flow conversion.

How is FY25 shaping up?

While the FY24 results were a positive for shareholders, the real focus and potential negative overhang on the stock is the renewed proposal to divest the fertiliser assets. Management previously ceased negotiations for the sale in early July this year but has put the separation of fertilisers back on the agenda.

Morgans believes the achievable sale price for fertilisers will be “poor,” with management writing down the business by another -$940.9m pre-tax to $791m after tax, leaving the book value for fertiliser at $414.3m.

Under the previous sale process, management had expectations for proceeds over $1bn. Perhaps this explains why negotiations were canceled in July and then reality set in.

Management has recommitted to completing the separation within the next six to twelve months. Citi outlines the differentiated sales processes for distribution and Gibson Island real estate are expected to start in early 2025, with the Phosphate Hill review by September 2025 and Geelong manufacturing to end by December 2025, with a transition to an import model.

Morgan Stanley explains the disappointing results from the Phosphate Hill plant, and while divestment remains the aim, certain outcomes remain “elusive.” This broker expects lower production for the plant in FY25 and FY26, noting Phosphate Hill only reached 900kt p.a. in three years out of the last decade and remains well short of its nameplate capacity of 980kt p.a. or the strategic target of 950kt annually.

JP Morgan views the timing of the separation as an “overhang” for the stock, while acknowledging the strategic re-orientation toward future earnings with less volatility from fertilisers is positive.

Strategically, the relatively new CEO, in place since Jan 2024, is working to re-orient earnings with a robust outlook for explosives, more predictable earnings, and stronger technology capabilities, all aimed at delivering a valuation re-rating of the company.

Earnings downgraded but average target price rises

While management did not provide fiscal guidance, FNArena’s daily monitored brokers reduced FY25 earnings forecasts due to Phosphate Hill, softer distribution guidance, and lower-than-anticipated growth in North American explosives.

The more positive observation is, while most forecasts are being pared back, the outlook promises a return to profitability and growth, albeit off a sharply negative FY24.

RBC Capital, referencing management’s statement, suggests momentum will continue into FY25: “FY25 is expected to be strong, supported by transformation activities focusing on areas such as price discipline, cost management, recontracting benefits, and improved margins from technology.”

RBC stands out with a Buy-equivalent rating and a $3.90 target price, raised from $3.60, citing management’s resumption of a $900m on-market share buyback, with $149m completed thus far. Goldman Sachs is also Buy rated with a $3.25 target. JP Morgan has a  Hold-equivalent rating with a $3.20 target.

Ord Minnett (target price $3.45) is the only daily monitored broker with a Buy-equivalent rating. Morgan Stanley (target price $2.90), Macquarie (target price $3.05), Citi (target price $3.20), and Morgans (target price $3.15) are all Hold-equivalent rated.

The FNArena consensus target price has risen 5% post FY24 results. Only daily monitored brokers are included in the calculation.

Morgan Stanley aptly summarises the stock’s outlook, noting management needs to execute the ongoing transformation, including full separation of the fertilisers business, to achieve a re-rating of the stock.

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