Where’s The Value In Incitec Pivot Shares?

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Chris Shaw

Incitec Pivot ((IPL)) yesterday report an interim profit result of $170 million, which in headline terms was slightly better than some in the market had expected. The issue for some stockbrokers was, however, the quality of the reported result. JP Morgan noted the financial result was helped by a lower tax rate plus a lower net interest expense, meaning operationally Incitec released a relatively weak profit report.

Further disappointment came in the form of a reduction in full year earnings guidance, management indicating full year profit now is likely to be closer to $380 million against previous expectations of a number closer to $450 million thanks to lower than expected fertiliser prices and a higher Aussie/US dollar exchange rate.

Despite the weak operational result the share price rallied by about 5%, Credit Suisse attributing this to the market looking through what had already been expected to be a weak result to what could flow through in the future. CS also puts the rally down to improved confidence no equity raising will be needed short-term given management’s comments to this end.

Yesterday’s price gains follow on from recent strong outperformance, Citi noting the stock has gained a little more than 40% from its lows as the market has turned its focus to the likelihood of stronger fertiliser prices and volumes in FY10. The problem, in the broker’s view, is both are unlikely. Citi agrees volumes should rise but adds there are few catalysts to push prices higher in the medium-term.

As a result the broker sees downside risk to earnings forecasts in both FY09 and FY10, even after cutting its own net profit forecasts by 13% and 14% respectively post the interim result. In earnings per share (EPS) terms this sees Citi forecasting 24.3c and 25.8c, while Credit Suisse is at 24.7c and 35.7c. Deutsche Bank is at 23c and 22c. Consensus estimates according to the FNArena database are 24.5c and 29.2c respectively.

Given the weak earnings growth forecast by Citi the broker views the stock as expensive and has downgraded to a Sell rating, pointing out at current spot prices the shares would be trading on a FY10 P/E (price to earnings ratio) of 12.4x, which is a 14% premium to the All Ordinaries Index and peer Orica ((ORI)).

Deutsche agrees and has similarly downgraded the stock to Sell, pointing out on its numbers the stock is trading at a premium to North American peers of more than 30% at present share price levels. While fertiliser price expectations are part of its view the broker also continues to see the proposed Moranbah ammonium nitrate plant as dilutive to group value given, on its estimates, the project investment will only generate a pre-tax return of slightly more than 7%.

But valuations are relative and on Macquarie’s numbers the stock is presently trading at a discount of a little more than 30% to the broader market, leading Macquarie to retain its Outperform rating post the interim result. UBS agrees, rating the stock as attractive enough on fundamentals to justify a Buy rating, especially as long-term gearing should improve in 2011 when Moranbah is commissioned.

RBS Australia is more cautious, pointing out while earnings guidance for the full year has been revised lower, the fact significant earnings headwinds remain in play suggests even the revised forecast by company management may prove to be too high. This is enough to justify a Hold rating.

Factoring in the downgrades by Deutsche Bank and Citi sees the stock now rated as Buy four times, Accumulate once, Hold three times and Sell twice, with an average share price target of $2.47, up from $2.43 prior to the interim result. Shares in Incitec Pivot today are litle changed despite a weak overall market and as at 11.20am the stock was up 1c at $2.48.

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