Incitec Pivot reported an underlying net profit of $318.7m for FY17, an increase of 8.0% on FY16, with group earnings before interest and tax (EBIT) rising 17.1% to $501.2m. Cash generation was strong and a final unfranked dividend of 4.9cps was declared, maintaining a 50% payout ratio.
The key driver of the result was a record growth in Americas EBIT, which increased 46.4% in constant-currency terms. This was due mainly to the group’s Business Excellence (BEx) initiatives – designed to promote a culture of continuous improvement – as well as Quarry & Construction (Q&C) growth and an initial earnings contribution from the ammonia plant at Waggaman, Louisiana (WALA).
Management also announced an on-market share buyback of up to $300m over the next 12 months, due to its stronger balance sheet position.
In keeping with tradition, Incitec Pivot did not quantify group guidance for FY18, but provided the following end-market commentary:
- Explosives – In the Americas, continued growth in the Q&C sector is expected to benefit earnings. In Asia Pacific, recent coal, base and precious metals, and international activity has been encouraging, and the long-term production outlook has improved, particularly in the Bowen Basin.
- Industrial Chemicals – Operational earnings are expected to grow as Waggaman continues to increase production levels. Earnings are subject to movements in global ammonia and natural gas prices.
- Fertilisers – This segment will continue to be dependent on global fertiliser prices and the AUD/USD exchange rate.
In our view, WALA remains key to group earnings growth as volumes are expected to reach nameplate capacity in FY18. The outlook for explosives demand also remains upbeat, driven by higher bulk commodity prices. Concerns remain over the Gibson Island fertiliser facility’s contract expiry at the end of FY18, and management pointed to plant closure if negotiations to secure access to economic gas were unsuccessful.
We believe Incitec Pivot is entering a period of earnings growth and strong cash flow generation. WALA earnings and improved explosives demand are expected to drive growth, although weak fertiliser prices and currency remain headwinds. Productivity benefits from the BEx program have supported divisional margins in recent periods and, along with the announced share buyback, are likely to result in EPS growth.
We maintain our Buy rating on Incitec Pivot, as the company continues to grow in challenged industry conditions, and have raised our target price to $4.30 from $3.80 given valuation support as we roll our model forward to December 2018.