Ord Minnett Research Recommendation: Incitec Pivot (ASX: IPL)
Incitec Pivot reported a first-half FY21 net profit before individually material items of $36.4m, well short of Ord Minnett’s $60.2m forecast. A fully franked interim dividend of 1cps was declared, versus our 2cps estimate, representing a 53% payout ratio.
At the divisional level, fertilisers earnings before interest and tax was well below our forecast due to the timing of sales from the Phosphate Hill operation, while Dyno Nobel Asia Pacific EBIT was 2.7% higher, and Dyno Nobel Americas missed our estimate by 13.9%.
A number of issues were timing-related, such as delayed fertiliser sales into the second half, the Louisiana Waggaman ammonia plant start-up being moved to the end of the previously provided range, and the ‘manufacturing excellence’ benefit target being pushed back one year to FY23. A delayed turnaround schedule due to COVID-19 was flagged as the key reason.
The company has identified the root cause of the latest issue at Waggaman, as disclosed on 10 May, and the plant is expected to restart at the end of May. Significant resources have been allocated to restart and improve reliability. We factor in 19.5 weeks of production in the second half, including two weeks in April.
Our view on Incitec remains unchanged. We see valuation support and potential upside to earnings if fertiliser prices remain elevated and the company can achieve its new manufacturing excellence target of $40–50m by FY23.
Management noted it would provide a business update including Waggaman’s performance by early August. If the Waggaman plant is running reliably through to that point, we believe sentiment should improve. We maintain our Buy recommendation with a $3.00 target price.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.