Ord Minnett Research Recommendation: Incitec Pivot (ASX: IPL)
Incitec Pivot provided a positive update on its Waggaman ammonia plant in the US and Moranbah ammonium nitrate (AN) facility in Queensland.
The Waggaman facility has had significant reliability issues in FY21 to date, but management confirmed the plant has been running at nameplate capacity since 1 June. We expect Waggaman earnings before interest and tax (EBIT) of US$62m in the second half, assuming Tampa ammonia prices at US$570 per tonne through to year-end and spot gas prices.
It was also pleasing to note Incitec’s Moranbah AN plant was back online following its scheduled turnaround.
Incitec Pivot’s share price peaked this year at $2.94 on 29 March. Consecutive disappointing updates in April and May related to Waggaman issues saw the share price reach a low of $2.26 by 27 May. With Waggaman’s reliability improving and key commodity benchmarks higher than in March, we expect the share price to revert to, or exceed, previous highs.
Tim Wall, president global manufacturing & HSE (health, safety and environment), will be leaving the company and a search to replace him has commenced. Wall was central to Incitec Pivot’s operational excellence strategy, but execution at the regional and plant level fell well short of expectations, in part due to COVID-19 limiting staff mobility. Management is moving away from its Australia-based centre of excellence for manufacturing to a model with a heavier allocation of resources at the regional and site levels.
Our EPS estimates have increased by an average of 4% over the FY21–23 forecast period. We expect FY22 EBIT of $626m, although at spot prices for diammonium phosphate (DAP), ammonia, urea, gas and currency, this estimate would increase 50% to $940m. At the net profit level, the potential upside is closer to 61%. We maintain our Buy recommendation and recently raised our target price to $3.10 from $3.00.
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.