Incitec Pivot: Can FY22 leverage the positive industry fundamentals?

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
14 September 2021, 9:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Incitec Pivot (ASX:IPL) has announced  that  its  US  ammonia  production  has  been  impacted  by Hurricane Ida. While this is out of IPL’s control, it does remind investors of the number of issues this plant has faced in FY21. It also results in another material earnings downgrade given the ammonia price is at historically high levels. 
  • While we  have downgraded our FY21 forecasts, we have left FY22/23 largely unchanged. We note that there is material upside to these years if fertiliser prices hold and importantly, IPL doesn’t have any more manufacturing issues. 
  • We  maintain an Add rating given IPL’s fundamentals are attractive  versus the broader market and Orica. However, we recognise that Waggaman needs to run properly for an extended period of time for the market to fully rerate the stock. 

Event - US ammonia production is impacted by Hurricane Ida

Like many chemical producers, IPL's ammonia facility in Louisiana has been impacted by Hurricane Ida. A lack of power supply means that IPL will lose four weeks of production. The lost EBIT is US$28m (A$38m), while the impact on NPAT is US$21m (A$29m). With a 30 September year end, this will affect FY21.

Analysis - timing couldn’t be worse given the high ammonia price

Importantly, Waggaman ran at nameplate capacity from the end of May until the plant was taken down on 28 August in anticipation of the hurricane. Thankfully the plant  isn't  damaged. The plant’s re-start  has been awaiting restoration of  high voltage industrial power and utilities from third party providers. While this is out of IPL’s control, the timing is unfortunate given the historically high ammonia price. 

Given the hurricane has impacted many producers’ production, it has  caused fertiliser prices to rise (Urea US Nola has increased to US$552/t from US$425/t in the last two weeks. It has also seen the Henry Hub gas price increase materially, pushing up the cost of fertiliser production.  

Despite another production downgrade, IPL is still on track to post strong earnings growth in the 2H21 reflecting materially higher fertiliser prices, favourable seasonal conditions and growth in its North American explosives business. IPL will report its FY21 result on 15 November. 

We revise our FY21 forecast; FY22&23 forecasts are largely left unchanged 

We have downgraded our FY21 EBIT forecast by 2.2% and NPAT by 2.9%. This is less than the quantum of the lost EBIT from Hurricane Ida due to higher fertiliser prices. Our FY22 and FY23 forecasts remain largely unchanged however we note there is material upside if current fertiliser prices hold near these levels.

In FY22, we assume an average DAP and ammonia price of US$470t and US$420t vs spot of US$632/t and US$615t respectively. If spot prices were to hold, our FY22 NPAT would  be  ~59%  higher. 

Most industry commentators expect fertiliser prices to remain high until at least the 1Q of 2022 given strong commodity prices, solid demand, supply disruptions and rising raw material costs.  

We forecast strong earnings growth in FY22 from reduced shutdowns/increased production volumes, a recovery in Asia Pacific explosives demand, strong fertiliser prices, a larger cotton season and the full benefits from IPL’s cost out program. FY21 lost EBIT from the outages and four turnarounds  was ~A$216m. FY22 will incur  two  more  turnarounds at  Cheyenne and  Phosphate  Hill.

The next major turnaround cycle will then not occur until FY25. With no major turnarounds planned for FY23 and FY24, we forecast IPL to generate strong FCF of ~A$450m pa.

Investment view - Add rating

Our valuation remains unchanged at (login to view). With significant leverage from positive industry  fundamentals and given its undemanding valuation (FY22F EV/EBITDA of only 6.5x), we reiterate our Add rating. IPL is a beneficiary of favourable weather and high fertiliser prices. It also has strong exposure to an economic recovery through its explosives business (solid demand for resources and Q&C will benefit from US stimulus packages). However, to deliver its true potential, manufacturing issues must no longer occur.

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