Amidst myriad challenges, Incitec Pivot ((IPL)) is targeting cost savings and a simplified balance sheet, with the intention of improving returns across its fertiliser and explosives businesses.
The company did not provide formal guidance but has outlined a new cost reduction plan in response to the pandemic, with savings of -$60m to be delivered incrementally over FY20-22. Yet details are limited on specific sources of benefit and, as end markets remain difficult, Morgan Stanley is one broker that remains to be convinced whether this will impact the bottom line.
UBS found the update reasonably positive, as it highlights a strategic focus on maximising returns from improving the reliability of manufacturing and investing in technology across both the explosives and fertiliser platforms. Significantly higher returns are being targeted through investment in faster cash-returning projects.
Incitec Pivot will also look at simplifying funding structures and working capital arrangements. There is a continued focus on manufacturing performance to leverage the recent recovery in the diammonium phosphate price, which UBS notes is now up 18% from recent lows.
Improved plant reliability is one of the key features, and reliability at 88% is up from 81% a year ago. Management has reiterated its $40-50m, 3-year benefit target from manufacturing efficiencies.
Morgans assesses Incitec Pivot is through the worst of the pressures, upgrading to Add from Hold, as fertiliser prices are now starting to recover from recent lows. Fertiliser distribution volumes have been strong, rising 16% over recent months, amid the benefits from improved seasonal conditions.
Still, because of lower fertiliser prices, a slightly stronger Australian dollar and more conservative assumptions for US ammonium nitrate volumes, the broker revises net profit estimates down for FY20 and FY21.
Incitec Pivot aims to transform fertilisers in Asia-Pacific into a leading Australian soil health business. Morgans notes the intent is to increase market share in the horticulture segment and, if an economical source cannot be found, maybe import nitrogen.
Gibson Island is experiencing a higher cost of gas, low urea prices and reduced demand for product because of low water availability in cotton-exposed areas. The company is hoping to secure economical gas after December 2022 and highlights the strategic location of this plant can handle imports.
Improved production and balance sheet metrics should allow investors to more readily consider the leverage to fertiliser prices and better seasonal conditions. Macquarie asserts the current share price is ascribing no value to the domestic fertiliser business.
Morgan Stanley also notes the update did not focus on fertiliser prices, although this is a crucial earnings driver. The broker assesses the trends as mixed and increases the second half diammonium phosphate forecast to US$300/t, concluding the business is heading in the right direction but commodity prices remain a headwind.
Dyno Nobel is well-positioned for medium-term growth with a strong market position and Morgans expects benefits from any US infrastructure stimulus will ensue as well as from cost reductions and an improved manufacturing performance.
Citi is pleased there are no plans afoot to add capacity in Australia until the ammonium nitrate market improves, while a resumption of technology trials after the disruption from the pandemic should mean growth in market share from advances in technology.
Comparable volumes in the June quarter were generally weaker for Dyno Nobel, but not unexpected given the pandemic. A return to earnings growth for Dyno Americas is anticipated in FY21 and Dyno Asia-Pacific in FY22 as the turnaround at Moranbah will affect the latter.
US coal production is down -27% in the year to date and this has affected Dyno Americas, although Macquarie is encouraged that demand appears to have levelled out in May and some recovery was observed in June.
Weak coal prices are affecting the company’s international and Australian explosives volumes. In the year to June, the quarry & construction volumes were up only 1% while base and precious metals were down -6%.
Management remains confident it can grow its Americas explosives market from FY21 and the leading technology offering is critical to this amid an opportunity to target Chile’s copper market. Demand for premium electronics is expected to increase and Macquarie expects the company’s technology platform will underpin its growth strategy in this regard.
However, the extensive focus on US coal exposure may be unwarranted, Credit Suisse believes, as the profit impact is relatively low because of the absence of high-value product. The broker also debates the issue of technology, assessing it is difficult to ascribe value estimates in this regard despite growth in sales volumes of electronic detonators and high energy emulsion.