Australia | 10:00 AM
After divesting of its troubled fertiliser business, Dyno Nobel has blown away forecasts with its first half explosives result.
- Dyno Nobel's performance in explosives significantly beat forecasts
- Transformation Program providing benefits
- Second half headwinds keep guidance unchanged
- Valuation gap has opened up with key competitor Orica
By Greg Peel
By Greg Peel
Dyno Nobel ((DNL)) has released its first half FY26 result (September year-end); the company’s first as a pure-play explosives business, having divested of its fertiliser business.
Underlying earnings per share moved up 91% year on year and 17% ahead of market expectations.
Earnings (EBIT) of $243m were up 39% and 3% ahead of market, notwithstanding a lower than expected contribution in the period from the outgoing fertilisers business.
Explosives' EBIT of $224m was up 28% year on year and 19% ahead of market expectations.
The divestment of the Phosphate Hill fertiliser plant has proven critical to the transformation of the company.
Phosphate Hill
It is ironic that at this time, as the prime minister scours the world for fertilser supply, Australia’s only producer of fertiliser was close to closing down.
Late last year Dyno Nobel, the owner of Phosphate Hill, near Mt Isa in Queensland, announced it planned to sell the plant by March, and if a sale had not been achieved by then, it would shut the plant by September.
As the Australian Financial Review reported at the time, the problem is Phosphate Hill consumes vast amounts of gas to make fertiliser products and it had had a difficult three years after its preferred suppliers –-Italian company ENI and the Northern Territory government-– failed to deliver the gas they were supposed to.
The shortfall forced Dyno to buy additional gas at daily market prices, exposing the company to much higher prices. For Australia, it was cheaper to import fertilser rather than produce it domestically.
Be careful what you wish for.
Dyno Nobel was forced to take a -$149.1m after-tax impairment on Phosphate Hill; part of -$476.6m charges that drove the company to a -$53.2m loss for FY25 (September year-end).
Hanging in the balance was the nearby Mt Isa copper smelter, owned by Glencore, which relies on the Phosphate Hill’s sulphuric acid production to process copper.
The smelter has been promised a $600m support package from state and federal governments to keep it open for at least two years, thus saving its workforce.
Phosphate Hill itself employs 540 workers.
A reprieve came in March when energy company Mayfair Australia agreed to buy Phosphate Hill for the princely sum of one dollar, albeit with a deferred consideration of up to $100m contingent on performance milestones.
Having divested of Phosphate Hill, Dyno Nobel is now Australia’s only pure-play explosives company.
Its only rival in explosives, Orica ((ORI)), also provides specialty chemicals and digital solutions to the mining industry.
Explosive
Dyno Nobel’s first half performance in Explosives beat forecasts because of the Americas, where earnings rose 60%, while Asia Pacific earnings rose 21%.
US coal industry customers drove the strong explosives demand.
This was offset by the division including Europe, Middle East & Africa and Latin America, which saw earnings down -18%.
The result also benefited from lower than expected corporate costs, down -20% year on year.
The period also saw an additional $49m of management’s Transformation Program benefits. The group earnings margin increased to 12.8% from 7.7% a year ago, reflecting the benefits of the Program.
Ammonium nitrate (AN) is the main input to explosives production, and on this front Dyno Nobel was in a much better position than rival Orica.
The AN market has suffered disruption not only from the Middle East conflict but also the Ukraine-Russia war and the closure of the significant CF Industries plant in Yazoo City in Mississippi following an explosion last November.
Yazoo City had been the sole supplier of Orica’s AN, which resulted in Orica’s explosives business achieving only flat earnings in the same period.
While Orica is now working to secure new sources, Dyno was able to trade its own surplus AN into a tight market, resulting in a US$5m benefit.
Dyno benefited from security of AN supply via a solid and reliable AN manufacturing position, Macquarie notes. There is potential for a 12% debottlenecking of its US production capacity.
Guidance
Despite the strong first half result, FY26 guidance has not been upgraded. Management reiterated FY26 earnings guidance for the Explosives business of $460-500m, up 11%-21% year on year.
The second half will face headwinds including a higher AUD (-$12m hit), -$5m of stranded costs post the sale of Phosphate Hill, and temporary cost increases (-$13m) from the Middle East conflict (higher raw materials and freight costs).
Pleasingly, Morgans notes, Dyno has now largely offset the US tariffs impact which was previously expected to adversely impact the group by -US$10m in FY26.
Explosives guidance had previously assumed a 40/60% first/second half skew, but given the stronger than expected first half and second half headwinds, Morgans now assumes a 46/54% skew.
Macquarie is making the same assumption, noting a long term average 45:55 skew, and 38:62 last year due to first half shutdown activity.
Management reiterated its aim to double Explosives earnings to $600m by FY28. Dyno is on track to achieve an earnings uplift of $30-70m in FY26.
The FY26 exit run rate target remains at 65-75% of the $300m earnings uplift.
Balance Sheet
Cash flow conversion was weak in the period; 39% compared to 116% a year ago, although Morgan Stanley expects this to normalise in the second half following the fertilisers separation.
Net debt was nonetheless below market expectations at $1.26bn with net leverage of 1.3x. Following completion of the Phosphate Hill sale, expected by 30 June, this ratio is expected to increase to around 2x due to the loss of associated earnings.
The company will resume its share buyback program on May 12 and it has $342m remaining under this program.
The interim dividend rose to 4.6cps (unfranked) compared to 2.4cps a year ago. Return on invested capital was 9.5%, up from 6.4% a year ago.
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