Incitec Pivot delivers record profit, flags a delayed split into two separately listed companies

Incitec Pivot (ASX: IPL) shareholders woke up to pot pourri of mixed news this morning with the explosives and fertiliser company up 7.35% after reporting a 45% lift in full-year revenue, a 580% rise in underlying earnings to $1.01bn and a tripling of shareholder returns for the full year.

Due to strong operating performance from its two category-leading businesses, earnings (EBIT) of $1.485bn were a slight beat against UBS and consensus expectations of $1.43bn and $1.45bn respectively, up 162% from $566m on previous period.

Equally impressive numbers within today’s result included earnings per share (ex IMIs) of 52.9 cents per share (CPS), up 34.4 CPS on the previous period, while return on invested capital (ROIC) of 13.8%, was a significant improvement on the previous 5.8%.

In addition to a fully franked 17 cents per share (CPS) final dividend, shareholders also stand to benefit from a $400m share buyback scheme over the next 12 months.

Group summary

Source: Incitec Pivot

Waggaman could be sold off

But strong underlying numbers and buyback aside, included within the company’s trifecta of news were revelations Incitec Pivot may offload its Waggaman (WALA) manufacturing plant in Louisiana.

The company flagged that it had received numerous unsolicited offers to buy the troubled ammonia plant, which has been plagued with mechanical issues and outages over the last few years.

Given the soaring profitability at Waggaman, now would be a good time to offload the asset.

“Our investments through the turnaround to improve asset performance coupled with the strong ammonia market dynamics make WALA a very valuable asset and an attractive investment opportunity for high-quality counterparties,” management noted.

“For this reason, we have decided to re-sequence our strategic priorities to assess the opportunity with WALA in the short-term, while we continue to progress our demerger plans.”

Split

Talk of a split is by no means new to shareholders with the company having previously contemplated a split, only to retreat on its plans.

Management also flagged that a potential sale of the Waggaman plant will in every likelihood delay the planned split of its fertiliser and explosives businesses by up to 12 months.

The plan is to have one company that specialised in fertilisers, while the other makes explosives for mining companies.

Management expects the creation of two separately listed companies to unlock shareholder value through sharpened focus on capital allocation and growth opportunities to ultimately deliver enhanced returns to shareholders.

Most likely outcome

While Waggaman would have become corralled into Dyno Nobel explosives business, post-split, management has hinted at a partial selldown that would result in Dyno retaining partial ownership of an asset with raw feedstock.

For the uninitiated, Waggaman consumes methane gas and turns it into ammonia, which is an intermediate product that is the basic feedstock for the manufacturing of both explosives and fertilisers.

A supply shortage, courtesy of the Ukraine war, saw Waggaman earn an average of US$843 for each tonne of ammonia produced in the year to September, up from US$381 per tonne in the previous year.

Despite a doubling in the cost of the gas consumed by Waggaman, earnings at the asset still managed to jump from US$3.6m last year to US$343.8m ($513.15m) in 2022.

Outlook

Due to the variability of commodity prices and foreign exchange movements the company typically doesn’t provide profit guidance, however the company notes:

Dyno Nobel Americas: Is well placed to benefit from heightened ammonium nitrate pricing. Negative impacts of higher inflation, energy costs and supply chain dislocations are expected to be mostly recovered in FY23 through price escalations and contract negotiations.

Dyno Nobel Asia Pacific: Favourable pricing conditions on the East Coast of Australia are expected over the re-contracting cycle.

Fertilisers Asia Pacific: Will continue to be dependent on global fertiliser prices, the A$:US$ exchange rate and weather conditions.

What brokers think

The company’s share price is up around 24% over one year.

Consensus is Moderate Buy.

Goldman Sachs is Buy rated with a target price of $4.40.

Based on the seven brokers that cover Incitec (as reported on by FN Arena) the stock is currently trading with 11.6% upside to the target price of $4.17.

Citi believes today's result revealed an in-line performance and retains a target price $3.70. Neutral rating.

Incitec Pivot share price over 12 months.