Incitec Pivot Limited

IPL Details

FY21 Financial & Operational Highlights:  Incitec Pivot Limited (ASX: IPL) is engaged in the manufacturing and distribution of industrial explosives, industrial chemicals, and fertilisers. For the year ended 30 September 2021, the company recorded revenue amounting to $4,348.5 million as compared to $3,942.2 million in FY20.

• Growth in NPAT and EBIT: IPL recorded NPAT excluding individually material items of $359 million against $188 million in FY20. EBIT for the year stood at $566 million as compared to $375 million in FY20. This was offset by higher commodity prices, partially offset by a strengthening Australian dollar.
• Improving ROIC and Free cash Flow: Return on invested capital (ROIC) improved by 61% to 5.8%, and free cash flow stood at $267 million as compared to $199 million in FY20.
• Enhancing Net Debt Position: IPL improved its net debt position to $1,004 million as on 30 September 2021 as compared to $1,029 million as on 30 September 2020.
• Dividend Declared: IPL declared a final dividend of 8.3 cents per share, 14% franked, which will be paid on 16 December 2021 at a record date of 2 December 2021.

Revenue & NPAT (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Disruptions: The company’s business could be impacted by uncertainties arising from the global pandemic.
• Foreign Exchange Risk: IPL’s operational and financial health could be impacted by any adverse movement in the foreign currency.

Outlook:

• For FY22, the company expects an underlying sustenance capital expenditure of around $320 million, with the final two large manufacturing turnarounds scheduled for the upcoming year.
• Corporate costs for the upcoming year will be around $37 million, which includes investments in Energy Transition ($2 million), International business development ($3 million), and HR Organisational Development and Diversity.
• The company has scheduled to conduct the 2021 Annual General Meeting on 17 December 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: 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: The company closed FY21 with cash & cash equivalents of $651.8 million as on 30 September 2021. On 8 November 2021, the company announced that its Gibson Island (GI) plant would be ceased for manufacturing operations at the end of the current natural gas feedstock supply arrangements, which will be expired at the end of December 2022. The stock is trading above its 52-week low-high average of $2.110 - $3.670, respectively. As on 15 November 2021, the stock has support and resistance level of $3.055 and $3.675, respectively. The stock gave a positive return of ~13.54% and ~35.68% in the past three and six months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of high-single-digit (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 uncertainties, and ceasing of manufacturing operations at GI plant. For the purpose of valuation, peers such as Orica Ltd (ASX: ORI), Nufarm Ltd (ASX: NUF), and Secos Group Ltd (ASX: SES) have been considered. Considering the expected correction, solid rally in the past few months, current trading levels and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $3.620 as on 15 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

IPL Daily Technical Chart, Data Source: REFINITIV 

Note: The purple colour line in the chart depicts RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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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