Incitec Pivot Ltd (ASX: IPL)

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IPL Details
Incitec Pivot Ltd (ASX: IPL) traded ex-dividend on November 23, 2017 and will be holding its Annual General Meeting in December 2017. The group’s recently reported FY17 result entailed Net Profit After Tax (NPAT) of $318.7m, depicting an increase of $190.6 over FY16 NPAT. There has been an increase of $23.5m or 8% when compared to FY16 NPAT excluding FY16 Individually Material Items (IMIs) of $167.1m. The group’s earnings before income tax also surged 17% and the result found support from BEx initiatives, earnings in Explosives segment and Waggaman, while there were some global headwinds.

Initiatives delivering value: The group’s business excellence (BEx) initiatives led to $176.0m of net productivity benefits in FY17, and collectively, the group delivered about $353.9m of net productivity benefits since program inception in FY12. The balance sheet has been enhanced by diversification of funds via a US$400m issuance, and the net leverage of 1.7x was within target range of ≤ 2.5x. The group now aims to conduct an on-market share buyback of up to $300m over the next 12 months.

Initial earnings from Waggaman: Explosives segment delivered EBIT growth of 9% driven by sustained Quarry & Construction growth and resurgent Coal and Base & Precious Metals activity in Americas and resilient Coal and Base & Precious metals demand in Asia Pacific. Industrial Chemicals’ EBIT was up 83% with initial Waggaman operational earnings (US$15.4m) while there were some delay damages. Fertilisers delivered flat performance at the back of pressure from decline in global fertiliser prices and the strengthening of the Australian dollar. Group’s Waggaman is now operating above nameplate and the plant is expected to operate at nameplate in FY18.

Decent Outlook: The company has been reluctant to provide any profit guidance owing to commodity prices’ fluctuations and foreign exchange movements. However, the group has unveiled that the Explosives segment would continue to witness growth with the Quarry & Construction sector expected to benefit earnings in FY18. Waggaman’s progress to higher production levels would also help earnings. However, movements in global ammonia and natural gas prices might play a role, and Fertilisers’ earnings would be dependent on global fertiliser prices and the exchange rates. The group expects a major turnaround of Phosphate Hill to commence in mid-March 2018 for about six weeks while the management aims to secure long-term economic gas to Gibson Island. The group’s corporate costs are expected to be approximately $22m.
 

Phosphate Hill Ammonium Phosphate Production (Source: Company Reports)
 
Stock Performance: In last one year, IPL stock has surged 23% (as at November 23, 2017) and is trading at high levels now. While on-market buyback can provide for a near-term share price rally, the outlook for fertiliser market looks weak and impact from company-specific headwinds including Gibson island closure might play a role. With some hiccups on outlook and trading scenario, we believe that investors can book profits in the stock (keeping the passing of the dividend record date of November 24, 2017 in view), as we give a “Sell” recommendation at the current price of $3.93


IPL Daily Chart (Source: Thomson Reuters)

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