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Waggaman Review Delays Incitec Pivot’s Split

Australia | Nov 17 2022

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

Buyout interest for the Waggaman operation in the US has delayed Incitec Pivot's demerger plans.

-Incitec Pivot delivered record FY22 performance, but have commodity prices peaked?
-Unsolicited interest for Waggaman has triggered a strategic review for the Louisiana plant
-Plans to separate Dyno Nobel and Fertilisers now on hold for up to 12 months

By Danielle Austin

Board and management at industrial chemicals, explosives and fertiliser business Incitec Pivot ((IPL)) remain convinced splitting the company in two independent units -Dyno Nobel and Fertilisers- remains the right strategy to unlock embedded value for shareholders.

This week, while releasing a record FY22 earnings result, the company nevertheless announced the demerger intentions have been delayed by between six and 12 months. The reason: the company has received unsolicited bids for its Waggaman ammonia plant in the US and intends to thoroughly review its options.

The financial result beat most forecasts. Underlying earnings increased 162% year-on-year to $1,485.2m with net profit lifting 186% to $1,027.1m. The strong result was underpinned by materially higher fertiliser prices. Shareholders were rewarded with a dividend of 17 cents per share, as well as a $400m share buyback. 

Fresh buy-out interest for the Waggaman ammonia operation in Louisiana (WALA) should not come as a huge surprise, even though the plant has caused operational headaches for the company in the past.

Waggaman’s US location has allowed the operation to be a beneficiary of low-cost gas, and its advantage has only further increased amid recent geopolitical events.

Currently, around 20-30% of Waggaman’s offtake is sold internally to Incitec Pivot’s Dyno Nobel business, and the company has indicated it will seek to retain this offtake agreement in the case of a sale in a bid to preserve its own access to low cost ammonia supply to maintain its downstream cost advantage. 

Near-term outlook splits analysts

Management at Incitec Pivot expects strong strategic and operating momentum to carry the company into the new fiscal year. Many an analyst covering the company agrees operational momentum remains strong.

Of the brokers monitored daily by FNArena's Australian Broker Call Report, three are equivalent Buy rated on the stock, three are equivalent Neutral rated, with one under research restrictions (and thus unable to provide a rating or valuation). The average target price is $4.34, with a range of $3.70 to $5.05.

Describing Incitec Pivot’s plans to undergo a strategic review of Waggaman as the more logical option, Morgan Stanley (Overweight, target price $5.05) expects there is greater potential to create value for shareholders.

The broker expects the demerger delay will be well received, noting the review may present a more accretive option. Morgan Stanley expects a range of valuations might be considered for Waggaman given the current nitrogen cycle. 

Macquarie (no rating) agrees the outlook for Incitec Pivot is positive, but this broker's attention is now firmly on the deferred demerger. Macquarie finds the delay of up to twelve month is lengthy, with the company citing complexities of the US regulatory requirement and its desire to retain the Dyno Nobel offtake contract.

UBS (Buy, target price $4.50) highlights Incitec Pivot’s significant leverage to elevated ammonia pricing underpins its rating, with global fertiliser prices remaining supported by tight supply.

Morgans (Add, target price $4.55) has lifted its earnings forecasts 3.9%, 4.3% and 3.8% through to FY25, accounting for higher fertiliser pricing and a lower Australian dollar.

Despite being a record result, Incitec Pivot’s full year net profit still missed Ord Minnett’s forecast by -2.5%. Both Ord Minnett (Hold, target price $4.30) and Credit Suisse (Neutral, target price $3.92) flagged commodity prices are already showing signs of moderating, with the latter expecting commodity pricing to become less of a tailwind throughout the coming year.

As a result, Ord Minnett expects momentum has likely peaked for the stock, but this broker remains positive on a longer-term horizon. Credit Suisse also flagged that while Incitec Pivot stands to recover value from the divestment of Waggaman given the initial low-cost construction of the asset compared to its current valuation, significant value would be lost to tax costs.

More subdued expectations for the years ahead are currently reflected in consensus forecasts that, post FY22 release, indicate Incitec Pivot's EPS is likely to decline by -10% in FY23 and then to decline by a further -37% in FY24.

Forecast dividend yields are respectively 5.8% and 3.7% while the consensus price target suggests more than 10% upside from today's share price.

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