DAP Prices Pivotal For Incitec

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

 By Chris Shaw

Last year di-ammonium phosphate (DAP) prices reached as high as US$1,230 per tonne on the back of what Bank of America-Merrill Lynch calls a “perfect storm” of a combination of record high grain prices, overstocking and record high input costs, but then fell away almost as quickly.

In the last six weeks or so the broker notes the DAP market has enjoyed increased activity and this has improved the pricing outlook, though it doesn’t expect a return to the boom prices of last year as it sees grain prices remaining well below their levels of last year, and any pick up in demand is likely to be met by higher operating rates and new supply. As well, a higher level of caution from distributors should see inventories remain near or below what are normal levels in its view.

Looking at the market picture for the next few months, the broker expects a steady rate of improvement in demand given the South American planting season starts ths month, there is likely to be some restocking in the US ahead of the October/November application season and buying from India appears to be on the increase.

China won’t be an exporter in coming months given high export tariffs at present, and with a number of major producers fully booked for the next two months the broker sees prices as being reasonably well supported in the shorter-term. To reflect this it has lifted its DAP price forecast for FY10 to an average of US$380 per tonne, up from US$350 previously, though it sees prices falling back to the US$350 per tonne level in FY11 as new capacity enters the market.

The broker’s long-term price forecast for DAP is US$330 per tonne, which is based on its estimated break-even point for non-integrated producers and assumes prices of US$250 per tonne for ammonia, US$40 per tonne for sulphur and US$120 per tonne for phosphate rock. 

Incitec Pivot ((IPL)) is Australia’s leading listed DAP producer, and not surprisingly the company’s share price has moved in line with fertiliser prices in recent years, soaring when prices hit record levels and struggling in recent months as prices retreated.

This is no surprise as Merrill Lynch notes DAP prices are the key single driver of earnings for the company, estimating for every US$10 per tonne change in the DAP price there is a 2.2% impact on net profit. Reflecting the changes to its fertiliser pice expectations, the broker has adjusted its earnings forecasts for the company and in earnings per share (EPS) terms now expects 21.6c this year, 24.4c in FY10 and a similar outcome in FY11. Consensus EPS forecasts according to the FNArena database stand at 21.2c this year and 24.5c in FY10.

The changes mean the broker’s price target on the stock has increased to $3.10 from $2.40 but there is no change in its Neutral rating, as with the stock trading in line with its discounted cash flow based valuation of $3.08 the broker sees the shares as fair value. This is particularly the case given ongoing concerns about declining ammonium nitrate volumes, free cash flow generation and the potential for a cut to current earnings guidance.

The broker is not alone in its cautious view on the stock as the FNArena database shows a total of one Buy, seven Holds and two Sells, with Credit Suisse this week downgrading to Neutral from Outperform given it, too, sees the stock as now trading around fair value.

The database shows an average price target of $2.85, which is below the current share price and highlights the valuation concerns of some of the brokers. It is worth noting a number of brokers who cover the stock have not updated their numbers for several months, though with the company having a September year-end this should change in the next month or so.

Shares in Incitec Pivot today are slightly higher today and as at 11.00am the stock was up 3c at $3.13.

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