November 1

Incitec Pivot Limited (IPL): Boom times

Incitec Pivot Limited (IPL) manufactures and distributes of industrial explosives, industrial chemicals and fertilisers to the agriculture and mining industries. IPL owns and operates manufacturing plants in Australia, North America, Europe, Asia, Latin America, and Africa. The company’s research and development focuses on practical ways to use new technologies to benefit its customers. Shares in Incitec Pivot trade below our $3.50 fair value. We think investor reaction to negatives is excessive and expect an imminent turnaround from explosives. Incitec can look forward to growing bulk commodity volumes, increasing battery metals mining, and infrastructure-related spending including renewables to underpin growth. Earnings from the core explosives business have slipped since FY19. Incitec announced some potentially unsettling news, including uncertainty around a fertiliser demerger/sale, leadership changes, and reduced gas under the ENI supply agreement to Phosphate Hill. However, explosives re-contracting is being undertaken in a far tighter market portending improved earnings. Easing labour and supply chain tightness are additional under-pinners.

Our unchanged $3.50 valuation hinges on two key assumptions: explosives earnings recommence moderate growth; and fertiliser earnings retreating to reasonable normalised levels. We anticipate an impending turnaround in fortunes for explosives. Explosives re-contracting has already seen impressive price increases in a tight market. But extraordinary cost escalation fuelled by Russia’s invasion of Ukraine and rising energy prices have so far more than countered.


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