Future Looking Less Fertile For Incitec Pivot

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

By Chris Shaw

Yesterday, fertiliser group Incitec Pivot ((IPL)) beat market expectations in delivering a FY08 net profit of $657 million, a result well in excess of Macquarie’s forecast of $598 million and JP Morgan’s $585 million estimate (to name but two examples), but as ABN Amro notes, the result has been overshadowed by the accompanying entitlement issue also announced.

The issue will see the company raise as much as $1.17 billion, with the funds to be used to refinance a bridge facility put in place to fund the Dyno Nobel acquisition and to provide additional capital expenditure for other projects such as Moranbah.

With the raising to be dilutive given the additional shares to be issued, stockbrokers have revised down their earnings per share forecasts. Although, fears of further falls in fertiliser prices mean most of the changes have been in excess of simply accounting for more shares in the market.

As an example, Macquarie has cut its EPS estimates by 30% in FY09 and 28% in FY10, with 17% of this related to the issue and some of the balance to account for a more conservative outlook on fertiliser prices going forward. ABN Amro has been similarly aggressive and cut its FY09 estimate by 26% to 50.7c, while its FY10 numbers have come down 31% to 52.8c.

Deutsche Bank has been less aggressive and lowered its EPS forecasts by 13-16% to 50c and 45c respectively in FY09 and FY10. This is because its previous forecasts were already at the bottom of the market. The FNArena database shows consensus numbers now stand at 58.3c and 53.9c. It must be noted not all brokers have released adjusted forecasts to account for the equity issue.

Among those that have done so there is now a reasonable diversity in terms of opinion on the stock, with ABN Amro and JP Morgan retaining Buy ratings, Macquarie and Merrill Lynch downgrading to Hold recommendations and Deutsche Bank cutting its rating to Sell from Hold.

In giving its Buy case, ABN Amro suggests while there will almost certainly be some share price weakness given the new shares are being offered at $2.50 each, this weakness will provide investors with a longer-term timeframe and an excellent opportunity to get set in the stock.

The stockbroker estimates a theoretical ex-rights price to be anywhere between $2.50 and $3.55 on an ex-dividend basis, so if the stock were to trade down in this range buyers should take note, as once commodity markets eventually settle the share price should recover quickly. JP Morgan suggests something similar, pointing out the company is well placed and with a positive outlook for soft commodities over the longer-term any excessive share price weakness should be taken advantage of.

Merrill Lynch argues the dilutionary nature of the issue and some shorter-term price weakness in fertiliser markets will make it difficult for the stock to outperform, making a Neutral rating more appropriate for the time being. Macquarie argues essentially the same thing, suggesting while it is largely the Dyno acquisition forcing the issue and so the dilution in earnings, the need to factor in more conservative estimates given a weaker outlook for fertiliser prices will hold back the stock in coming months.

Deutsche Bank goes a step further though, estimating at the $2.50 issue price the company is trading on a FY09 P/E (price to earnings) ratio of 5x, which while looking cheap compared to the market as a whole, puts the stock at a premium of around 22% to its global peers. This, says Deutsche Bank, justifies a Sell rating.

Add in the fact fertiliser prices could easily fall further, group capital expenditure continues to increase and the Moranbah project looks to be value dilutive and the broker sees little reason to be in the stock. As well, Deutsche Bank counters the company’s argument there is as much as US$200 million in synergy benefits from the Dyno acquisition by pointing out this would require cutting the cost base by as much as 20%, and the company is spending US$200 million over three years to achieve these benefits.

Post the result and issue announcement, the FNArena database shows the company is rated as Buy six times, Neutral three times and Sell once, with only six of the 10 brokers having updated their numbers this morning to reflect the issue.

The average target price according to the database is $5.70, down from $7.18 prior to the issue and result announcement. Shares in Incitec Pivot are currently suspended as the issue is put away.

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