Company Overview: Incitec Pivot Limited (ASX: IPL) engaged in the manufacture and distribution of industrial explosives, chemicals, and fertilisers. It operates in the two reportable segments of the Asia Pacific and the Americas region. The Asia Pacific comprises of two segments – Fertilisers Asia Pacific (Fertilisers APAC): It manufactures fertilisers in Eastern Australia, Dyno Nobel Asia Pacific (DNAP): It manufactures and sells industrial explosives and related products to the mining industry in Turkey and the APAC region.

IPL Details

Decent Growth Enabled by Technology Improvements & Manufacturing Processes: Incitec Pivot Limited (ASX: IPL) manufactures and distributes industrial explosives, chemicals and fertilisers. The market capitalisation of the company as on 26 April 2021, stood at ~$5.16 billion. As per a recent update, the company has announced that it expected to re-commence the production in its Waggaman Ammonia Plant by mid of April 2021, after a shut down due to the result of a dry gas seal failure.  

The company has confirmed that the Louisiana, Missouri, plant has resumed services as planned. It also updated that the preparation for the turnaround of the Moranbah plant in the month of May 2021, remains on track.

During FY20, the company reported resilient performance, on the back of an improvement in technology and manufacturing performance. The revenues were in line with that of the previous year of $3,942 million. EBIT (ex IMI) grew by ~23% to ~$375 million during FY20, from ~$304 million in FY19. There was also an improvement in the NPAT of the company (ex IMI) to $188 million, compared to $152 million in the prior year. It reported a decrease in the borrowing costs by $8 million to $136 million during the period, driven by lower interest costs on refinanced US dollar bonds.

FY20 Financial Performance (Source: Company Reports)

FY20 Performance Underpinned by Decent Segment Fundamentals: The company's Dyno Nobel vertical of business provides explosives of high quality to its clients, which includes the likes of RioTinto, ANGLO AMERICAN, to name a few. The business provides a decent margin performance of ~15% EBIT, owing to the use of premium technology and aided by its strategic location close to customers. IPL is one of the leading players in the East Coast Market in the fertiliser segment, supported by extensive distribution platforms and volumes. It has decent exposure to industries like dairy, sugar, cotton, etc. The segment is poised to grow further with a gradual increase in Di-ammonium Phosphates (DAP) and Urea prices.

Business Segments (Source: Company Reports)

Range Pilot Update: As per an update on 12 April 2021, Central Petroleum Limited has announced that Range-6 has been spudded on 11 April 2021.  The Range pilot consists of three wells spaced at 200m and is expected to provide vital information regarding reservoir productivity, gas desorption, and other key statistics. The Range Gas Project is a 50:50 JV between a wholly-owned subsidiary of IPL and Central.

Key Businesses Update: The company expects the earnings for H1FY21 to be in line with the prior corresponding period, in the Dyno Nobel Asia Pacific Explosives business. It anticipates that the favourable weather conditions and the recent uptick in fertiliser prices to drive the earnings upwards in FY21. The six-week turnaround of the St Helens plant was completed successfully in November 2020.

Top 10 Shareholders: The top 10 shareholders together form around 39.79% of the total shareholding, while the top 4 constitute the maximum holding. Harris Associates L.P. [Activist] and Allan Gray Australia Pty Ltd are holding a maximum stake in the company at 8.52% and 6.03%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: During FY20, the company delivered decent margin performance with an improvement in the Gross and EBITDA margin over the prior year. The gross margin stood at 53.7% during the period, compared to a margin performance of 50.1% in FY19. EBITDA margin also improved to 16% in FY20. ROE of the company stood at 2.5% during the period. There was an uptick in the current ratio of the company to 1.15x, from a level of 0.62x in the prior year. The cash cycle were at an impressive negative 80.7 days in FY20. The cash position improved to $554.6 million as of 30 September 2020, from March 2020 levels. Leverage (Net Debt/ EBITDA) too decreased to 1.4x in FY20, an improvement from 2.8x in FY19.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company is exposed to interest rate risk as the Group's interest-bearing liabilities are unsecured. It has operations in different regions and is exposed to foreign exchange risk, primarily in USD, owing to its transactions in sales and purchases, trade receivables, etc. The company’s line of business also exposes it to change in commodity price risk, and it strives to mitigate it by entering into long-term contracts with its customers. IPL is also prone to the risk arising from the prolonged shutdown or downturn of its plants, due to maintenance or breakdown of some key machinery. The company expects adverse impact on its H1FY21 earnings before interest and tax to be approximately $36 million due to the disruption in operations in the Waggaman plant.

Outlook: The company has delivered resilient performance in FY20 despite the impact of the COVID-19 pandemic on the business environment. It has experienced explosives and fertilisers volume growth in the Australian market. It plans to achieve technology-driven earnings growth of 10% by FY22 in the explosives segment. It has delivered an improvement in reliability to 86% in FY20, and is planning to deliver ~95% reliability by FY22. The recent increase in the prices of the fertilisers augurs well for the company and it expects decent growth in the segment going forward, aided by favourable weather conditions. IPL will announce its H1FY21 results on 17 May 2021.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: IPL expects to deliver a cost-saving of $30 million in FY21. As per ASX, the stock of IPL is trading above its average 52-weeks’ levels of $1.807-$2.980. The stock of IPL gave a positive return of ~24.41% in the past six months and a positive return of ~27.40% in the past one year. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average EV/Sales (NTM Trading multiple), considering the uncertain operating conditions due to the COVID-19 pandemic and exposure towards foreign currency risks. For the purpose, have taken peers such as Orica Limited (ASX: ORI), Amcor PLC (ASX: AMC), to name a few, which come under Materials Space. Considering the expected upside in valuation, resilient performance in FY20, decent business fundamentals, re-commencement of operations in the Waggaman Ammonia Plant and optimistic outlook in the fertilisers business, we recommend a ‘Buy’ rating on the stock at the current market price of $2.640, down by 0.752% as on April 26, 2021. 

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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