Incitec Pivot's FY21 earnings result has blown broker forecasts away, and with more to come, capital management is now underway.
-Incitec Pivot's FY21 a substantial gain better
-Turnaround in a difficult year
-Prices remain supported
-Capital management on the map
By Greg Peel
It was not the most favorable first half of FY21 for fertilizer/explosives producer Incitec Pivot Ltd (ASX:). Let's count the ways:
Heavy plant maintenance and turnaround schedule; production loss due to Hurricane Ida; unplanned production stoppages; and negative exchange rate movements.
But Incitec followed with second-half performance that blew brokers away, leading to a substantial blow to consensus forecasts for full-year earnings. While there were several driving factors, high ammonia and diammonium phosphate (DAP) prices were the main ones.
"It's hard to imagine," notes Credit Suisse (SIX:), "how consensus forecasts missed the impact of fertilizer prices on IPL's FY21."
Yet it is not a bull's eye. Brokers are all pointing to stronger fertilizer prices in the future as a result of strong demand meeting limited supply.
Not getting much better
The demand side is driven by favorable weather conditions for agriculture across the Incitec region, not just Australia. We need only mention yesterday's earnings result and outlook for Elders Ltd (ASX:), which, among other things, sells fertilizers in a wide range of geographic areas, including an expectation of another 12-18 months of solid seasonal conditions.
On the supply side, nitrogen-based fertilizers (ammonia is a compound of nitrogen and hydrogen and DAP a compound of nitrogen, hydrogen, phosphorus and oxygen) are derived from (methane) and the world, especially the Northern Hemisphere, suffers from a critical shortage of gas and consequent rising prices.
Russian cuts in gas supply to Europe are part of the problem and China has also restricted exports. With investors and lenders now shying away from further fossil fuel development, there is little prospect of gas shortages, especially heading into the northern winter.
To this equation we add the full plant occupancy at Incitec's production facility in Moranbah (Queensland) after a difficult period and the Waggaman plant (US) which is now back to full nameplate capacity in the wake of the hurricane ida.
Bearing in mind that fertilizers are also used to produce explosives for the mining industry, brokers point to a reasonable chance of a positive increase in product mix in Australia and an accelerating quarry and construction sector in the Americas. In the US, President Biden this morning signed the $1.2 trillion bipartisan infrastructure incentive bill that has been so long in the making.
All of the above suggests that Incitec Pivot will be an ATM, at least for the short term. FY21's final dividend of 9.3c also exceeded broker expectations, as did the level of debt reduction. This gives Incitec balance sheet flexibility and, as all brokers suggest, the prospect of future capital management.
There are five buy and two hold or equivalent ratings for Incitec Pivot in the FNArena brokerage database. The consensus target has risen from $3.24 on a $3.14 range to $3.56 from Credit Suisse (Neutral), which believes the benefit lies more in capital management than stock price per se, and Morgan Stanley (NYSE:) 4.30 (Considered)
Consensus dividend forecasts for FY22 suggest a return of 5.0%.
"Explosive Result for Incitec Pivot" was originally published on FNArena.com and republished with permission.
