Stock Review : Incitec Pivot (IPL) for growth in your portfolio

I received an email from a reader regarding a brokers recent analysis of Incitec Pivot (IPL) and whether they should buy the stock. The broker has a buy on the stock with a share price target of $190.48 - and I have to concur with the recommendation, though I think the stock will go over $200 in the next few months. Based on the broker review and my research here is a review of the stock. Even though the absolute share price is high, I am considering this stock given the global boom in fertilizer companies – similar companies in the US have risen almost 100% this year as compared to IPL 50% rise.

IPL's 1H08 result significantly exceeded analyst forecasts. However, the broad themes were in line with expectations - strong earnings growth on the back of rising fertiliser prices, improved seasonal conditions, cost savings (above guidance) and a solid balance sheet, which remains well positioned for acquisitions. It is important to note that the first half is always IPL's seasonally smaller half with fertiliser application for the winter cereal crops in April/May/June and for cotton in August/September. As expected not a lot news was released on the Dyno Nobel (DXL) acquisition. However IPL intends to make a decision on Moranbah prior to September and the synergy benefits update will be in November. BUY maintained.

• IPL reported a 1H08 NPAT excluding significant items of A$171.1m, up 245% on the pcp (A$49.6m), which was above the forecast of A$143.1m. Reported NPAT of A$169.8m included significant items of -A$1.3m (after tax) due to business restructuring.
  


• EBITDA increased to A$269.0m, up 163% on the pcp. EBITDA generated by IPL’s base business was A$136.0m, up 156%, reflecting rising fertiliser prices, growth in Fertiliser Trading and improved seasonal conditions. EBIT of A$250m was up 198% on the pcp (A$83.9m). This was above forecast of A$214.5m. EBIT margins increased to 33.4% from 15.4% the pcp.
  


• The Board declared a 204cps fully franked interim dividend, compared to forecast of 191cps and 69cps the pcp. This equates to a payout ratio of 60% which is in line with IPL’s recently revised policy of 55-65%.
  


• Sales revenue increased 38% to A$749.3m on the back of a 5% increase in sales volumes to 1.373mt.
  


• IPL's Business Efficiency Program (Tardis II) delivered A$28.2m before tax in the 1H08. This was in fact, IPL's full year target. This takes the total efficiency achieved by the program to A$143.1m.
  


• IPL's balance sheet remains strong with gearing (debt/(debt + equity)) at 51.8% (falls in 2H after winter cropping sales), compared to 50.5% the pcp and A$88.9m in cash (A$49.3m the pcp). Management should be commended on keeping working capital at 2007 levels despite the step change in fertiliser prices (A$180m impact).
  


• Cashflow comments – operating cash inflow of A$21.0m compared to an outflow of A$53.2m the pcp. Capex fell to A$24.2m, from A$53.1m the pcp.

Outlook - IPL didn't specifically upgrade guidance however it did say that if you assume second half DAP price of US$1,100/t then the average DAP price for IPL would be US$910/t in FY08. This price would see IPL report an FY08 EBIT of A$850m compared to previous guidance of A$700-730m previously. It is important to note that rainfall between Anzac Day and the Queen's Birthday remains a key driver of IPL’s domestic sales.

However we stress that IPL is no longer just an East coast rainfall story as the number one driver of earnings is the rising price of fertiliser, a global commodity. A number of growth opportunities including DXL, Aceh and UCG ammonia plant, potentially Moranbah and debottlenecking and plant expansion are on the go. We recommend the stock as a BUY.

More news on IPL at Reuters