Incitec Pivot reported an FY18 net profit of $347.4m before individual material items, below Ord Minnett’s forecast of $376.2m, while earnings before interest and tax (EBIT) of $556.7m came in 11.1% above FY17 but below our $588.6m forecast. Soft fertiliser earnings were the key reason for the profit shortfall, while earnings from the Dyno Nobel explosives unit came in higher than we expected. An unfranked final dividend of 6.2cps was declared, below our 7.0cps estimate.
Key drivers of the result included contributions from the Waggaman, Louisiana (WALA) and Moranbah, Queensland operations, a weakening Australian dollar, growth in the quarry and construction (Q&C) business, and strong – albeit volatile – global fertiliser prices. We make the following observations:
- WALA, which represents 47% group FY18 EBIT, should see growth above nameplate capacity – we estimate a rate of 103% in FY19 – and the North American market for its Q&C business remains attractive.
- The balance sheet should remain strong with the remaining $90m of the $300m buyback expected to be completed in the first half of CY19.
- FY19 sustaining capital guidance has increased by about $30m to $250m due to gypsum-related conversions at Phosphate Hill.
Incitec Pivot is seeing a period of strong operational performance and earnings growth. WALA earnings and improved explosives demand are expected to drive growth, although volatile fertiliser pricing and currency remain headwinds. Productivity benefits from the Business Excellence program have supported margins and, along with the share buyback, are expected to generate EPS growth, although concerns remain over the Gibson Island gas contract.
We have reduced our earnings forecasts for Incitec by 2.3% in FY19 and 0.1% in FY20, leading us to lower our target price to $4.20 from $4.25, but we maintain our Buy recommendation.