Earnings Fizzle

Incitec Pivot manufactures and distributes fertiliser products, industrial chemicals and explosives through its operations globally. In FY18, Asia Pacific represented 53% of group earnings before interest and tax (EBIT), while the Americas contributed 47%.


Incitec Pivot reported a first-half FY19 underlying net profit of $41.9m, down 71.5% on the same period last year and below Ord Minnett’s forecast of $47.9m. An unfranked interim dividend of 1.3cps was declared and the remainder of the $300m on-market buyback was completed in the half.


EBIT of $118.7m came in 50.6% below a year ago, due to significant one-off items. This was also behind our $141.3m estimate due to a weaker than expected performance from the fertilisers and Dyno Nobel Asia Pacific (DNAP) explosives businesses.


We expect key commodity prices to recover in FY19, with further potential upside to Incitec’s ammonia price forecast of US$298/t, versus our US$284/t forecast. Announced manufacturing excellence projects across Waggaman, Louisiana (WALA) and Wyoming in the US, and Moranbah and Phosphate Hill in Queensland are also estimated to deliver an earnings uplift of $40–50m per annum before FY22. Offsetting this, about $13m of contract renegotiations will affect the DNAP business in FY19 and are likely to prove a drag on earnings due to lower ammonium nitrate prices.


WALA earnings and improved explosives demand are expected to drive growth, although volatile fertiliser pricing and currency remain headwinds, with uncertainty around the Gibson Island contract a distraction.


The FY19 EBIT guidance mid-point of $392.5m – versus $420m previously – implies a 30%/70% earnings skew in 1H/2H and consensus downgrades of about 14.6%. We have reduced our earnings forecasts by 11% in FY19 and 4% in FY20, leading us to lower our target price to $3.75 from $3.90, although we maintain our Buy recommendation.

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