Australia | May 18 2023
Consensus downgrades are expected following first half results by Incitec Pivot, though some brokers see value on offer.
-Underlying first half profits for Incitec Pivot fall shy of consensus
-Fertilisers segment underperforms
-UBS notes shares are trading at a discount to value
-Demerger plans not derailed by weaker fertiliser prices
By Mark Woodruff
While shares in Incitec Pivot ((IPL) retreated by nearly -8% to $2.94 yesterday following first half results, Ord Minnett today upgrades its rating to Accumulate from Hold and maintains its $3.50 target price. Underlying profits marginally exceeded the broker’s forecast.
Of course, changes to ratings and targets depend on your starting point. Morgans downgrades its rating to Hold from Add and lowers its target price to $3.29 from $4.55, noting its original forecasts were above consensus.
According to Neutral-rated Citi, first half underlying profit was a miss against consensus and the broker’s forecasts of -21% and -12%, respectively. As a result, this broker’s target falls to $3.15 from $3.40.
As Buy-rated UBS points out, the FY24 price earnings ratio for Incitec is trading at a -15% discount to the 10-year average, and shares are also trading at a -10% discount to book value compared to a 10-year premium of around 20%.
This broker suggests consensus forecast were stale and only marginally lowers its target to $3.40 from $3.55.
The upshot is an average target price from six brokers in the FNArena database of $3.43, which suggests 14.8% upside to the latest share price, which has recovered by over 4% today at the time of writing.
Morgan Stanley (Overweight, target $4.10) is yet to update for yesterday’s result, while three of the remaining brokers have a Hold (or equivalent) rating, and two are the equivalent of Buy recommendations.
Outside of the daily coverage, Goldman Sachs is on research restriction, but notes profit for the half missed its expectations by -22%.
The miss was relatively broad-based, according to the broker, albeit with the greatest variance in the Fertilsers business, in which distribution was impacted by adverse weather and delayed farmer purchases, though the key disappointment occurred at Phosphate Hill.
Volumes at the ammonium phosphate production facility fell -10% below Goldman’s forecast due to an ammonia equipment issue, with the financial impact exacerbated by still-elevated commodity prices.
Inclement weather in both North America and Australia also impacted the Dyno Nobel Explosives segment, though management is anticipating price momentum from price resets in Australia from late FY23.
Apart from lower production at Phosphate Hill, the analysts also attribute the weak Fertilisers performance to higher gas costs at the facility.
Upon returning from research restriction due to involvement in the sale of the Waggaman ammonia plant (a part of Dyno Nobel Americas), Macquarie resumes coverage with a Neutral rating and $3.15 target.
Hopefully this asset won’t be too badly missed in the future, as Morgans notes Waggaman was the only business unit which reported earnings growth in the first half.
Macquarie expects the sale will close by end of 2023 and expects it to clear anti-trust hurdles. Positively, the broker points out this disposal will reduce Incitec’s earnings exposure to volatile ammonia prices, while also reducing associated plant production risk.
Behind Morgans rating’s downgrade
Morgans explains the significant fall in fertiliser prices in recent months has weakened the group’s outlook and will result in material consensus earnings downgrades.
Apart from this, the broker sees further earnings uncertainty from additional near-term downside for fertiliser prices and delays to the share buyback and demerger plans.
Managing Director Jeanne Johns noted slumping fertiliser prices should not detract from the goal of splitting the company in two.
The board still feels the demerger is a tax-efficient way of unlocking value for shareholders, but it is looking at the optimal timing. The material fall in fertiliser prices would not be helping its case, in Morgans view.
Capital Management
Incitec intends to commence its previously announced on-market share buyback of up to $400m by end of 2023, which UBS considers a potential share price catalyst. When this is complete, the board will consider further capital management initiatives.
The company declared an interim dividend of 10cps, ahead of the 9cps forecast by Ord Minnett on a slightly higher payout ratio of 55%, which equates to a 7.5% yield on last night’s closing share price. The broker’s 2023 dividend forecast is raised by 20% to 21cps.
Management's Outlook
Incitec Pivot expects strong earnings in the second half for the Explosives business and earnings to be skewed more towards the second half. Re-contracting by Dyno Nobel Asia Pacific (DNAP) is also set to benefit earnings from FY24.
Moreover, the company expects Fertilisers will benefit from favourable conditions in East Australia in the second half of the financial year.
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