Company Overview: Incitec Pivot Limited (ASX: IPL) is mainly engaged in the manufacturing and distribution of industrial explosives, industrial chemicals and fertilisers, as well as the provisioning of related services. The global manufacturing facilities of the company produce a wide range of explosives, fertilisers and industrial chemicals. The company is known as a global leader in the resources and agricultural sectors, with an unrelenting focus on Zero Harm. The company operates its business through segments such as Dyno Nobel Americas, Dyno Nobel Asia Pacific, and Fertilisers Asia Pacific.

IPL Details

Equity Raising in Second Half to Support Future Business Growth:  Incitec Pivot Limited (ASX: IPL) is primarily involved in the manufacturing and distribution of industrial explosives, industrial chemicals and fertilisers. The market capitalisation of the company stood at ~$4.05 billion as on 16^th November 2020. As the company is known for its focus on zero harm, IPL recorded Total Recordable Injury Frequency Rate (TRIFR) of 0.57 in FY20, which indicates an improvement of 29% over FY19. Despite the challenges faced in FY20 due to COVID-19 pandemic, the company delivered a decent operational performance with revenue growth of ~0.6% on Y-o-Y basis. In addition, the company responded quickly to execute new control measures in order to keep its people and customers safe throughout the pandemic. This allowed the company to provide uninterrupted supply to customers in the essential resources and agricultural sectors.

During FY20, the company experienced a rise of $186 million in manufacturing recovery, which was supported by enhanced production performance at Phosphate Hill and Waggaman, as well as lower gas cost from improved supply reliability at St Helens. Also, the company achieved cost savings of $20 million, generated by operational productivity measures, cost efficiency gains and non-essential spend savings. Moreover, the company seems well-positioned to weather the impact of the global health pandemic. In addition, the company is focusing on new value-add products and services, which include efficiency-enhanced coated fertilisers and new soil-testing services for precision agriculture.

The company bolstered its balance sheet with the help of the equity raising of $646 million in 2H FY20, which supported the financial resilience and flexibility of the company. The company closed FY20 with a rise of $11 million in trade working capital (TWC), which was underpinned by lower utilisation of working capital facilities of $135 million, and strong TWC management which reduced underlying TWC by $124 million over the previous year. As on 30th September 2020, the company recorded a fall of $663 million in net debt to $1.03 billion. In addition, net debt/EBITDA for the period stood at 1.4x as compared to 2.8x in FY19. It was mainly supported by $125 million of improved EBITDA ex IMIs (Individually Material Items) in FY20 and net proceeds from the equity raising in 2H FY20. Operating cash inflows for the year increased by $130 million to $545 million in FY20.

Net Debt & Hedges (Source: Company Reports)

COVID-19 Response Plan to Support Reduction in Costs: During FY20, the company reported revenue amounting to $3,942.2 million as compared to $3,918.2 million in FY19. IPL reported statutory NPAT of $123.4 million against $152.4 million in FY19. NPAT for the year includes after-tax IMIs of $65 million, which are related to the write-down of obsolete technology; and software and implementation costs of the company’s ‘Response Plan’ to reduce costs and lessen the earnings impacts of softer commodity prices and COVID-19. The company reported a rise of 1.4 cents per share in earnings per share (EPS) ex IMIs to 10.9 cents per share. In addition, the company has decided not to pay a final dividend for FY20 considering the ongoing uncertainty due to COVID-19 and the company equity raising in May 2020. However, there is no change to the dividend policy of 30% – 60% of NPAT.

Key Financials (Source: Company Reports)

FY20 Segment Performance: During FY20, Dyno Nobel Americas reported total revenues amounting to US$1,018.9 million as compared to US$1,102.8 million in FY19. In addition, the segment recorded EBIT (ex IMI) of US$155 million, reflecting a fall of 5% over pcp. The earnings included one-off profit on the sale of excess land of US$8 million. With respect to Dyno Nobel Asia Pacific, the company reported earnings of $149 million, indicating a fall of $30 million, owing to contract losses, contract renewal manufacturing performance, and decline in market volumes. However, the Fertilisers Asia Pacific segment reported earnings of $26 million, reflecting an increase of $106 million. This was supported by a rise in distribution volumes, manufacturing recovery and lower gas costs.

Segment Performance (Source: Company Reports)

Decent Growth in Profitability Margins: During FY20, the company reported gross margin of 53.7%, which is higher than the industry median of 14.7%. EBITDA margin for the period stood at 16% as compared to the industry median of 15.4%. Current ratio of the company stood at 1.15x in FY20 as compared to 0.62x in FY19. This indicates that the company has improved its position to pay off its short-term obligations. In addition, the company recorded negative cash cycle of 80.7 days as compared to the industry median of 26.9 days. On the leverage side, debt to equity ratio of the company stood at 0.41x as compared to 0.57x in FY19. Asset to equity ratio for the period stood at 1.79x against 2.0x in FY19.

Key Margins (Source: Refinitiv, Thomson Reuters)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Incitec Pivot Limited. Perpetual Investment Management Limited is the largest shareholder in the company, with a percentage holding of 7.99%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s business is sensitive to numerous risks, which include the risks arising from COVID-19 on its people and operations. In addition, the extent of the future impact of COVID-19 may prove as a major headwind for the business. IPL’s performance could also be impacted by the competitor dynamics and industry structure as it operates in highly competitive markets. The company is also exposed to supply chain risk, adverse movement in commodity prices and demand for its products. The company is also susceptible to the climate change related financial risks, environmental risks associated with product tracking and spills across its fertilizer distribution centres.

What to Expect: The company is expecting cost savings of $60 million per annum by FY22, out of which, $30 million are likely to be delivered in FY21. The company stated that its premium technology would continue to support the growth of its Explosives business. In addition, the company is targeting technology driven Explosives EBIT growth of 10% by FY22. With respect to Dyno Nobel Americas, the company anticipates low production in 1H FY21 at Waggaman operation. With respect to Fertilisers Asia Pacific, the company stated that the Fertilisers earnings are likely to be dependent on global fertilisers prices, and the A$:US$ exchange rate and weather conditions. For FY21, the company anticipates a net borrowing cost of around $125 million, owing to low debt levels. The company’s effective tax rate for FY21 is anticipated to be in the range of 21% and 23%. The company is likely to conduct its 2020 Annual Shareholders Meeting on 18th December 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is witnessing conversion and upgrades to its technology, which in turn is generating safe and efficient operations on the ground for its customers in the key markets of Quarry and Construction and Base and Precious Metals. Moreover, the company seems well-positioned to weather the impact of the global health pandemic. In the past three and nine months, the stock of IPL has corrected by 2.30% and 31.39%, respectively. As a result, the stock is trading closer towards its 52-week low level of $1.565, offering a decent opportunity for accumulation. On a technical analysis front, the stock of IPL has a support level of ~$1.799 and an immediate resistance level of ~$2.207. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). Considering the decent balance sheet with a decline in net debt position, growth in manufacturing recovery, decent cost savings strategy, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.120 per share, up by 1.435% on 16^th November 2020.

IPL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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