Happy Separation
Shares of this diversified manufacturer and distributor of explosives and fertilisers, Incitec Pivot (ASX:IPL), dropped last Monday, after the company announced its plan to spin off its explosives segment from its fertiliser business, despite delivering a record half-year profit. The short-term concerns over the new Labor Government’s planned climate action and a global energy crunch fuelled gas prices triggered the split. Still, over the long-term, we think the higher demand for products from the mineral and agricultural sectors will mitigate these headwinds and lead both businesses to a higher stage in the future.
While Incitec Pivot has been buoyed by an upturn in commodities that has fuelled demand for fertiliser and explosives, shares in the company have remained well off record highs achieved in 2008. We think there are opportunities in its shares to perform higher on this front.
Intention to split into two
Incitec Pivot (ASX:IPL) announced its intention to implement a structural demerge of its Incitec Pivot Fertilisers and Dyno Nobel businesses into two separately listed companies on the Australian Securities Exchange in 2023, subject to shareholder approval, as the two businesses increasingly diverge. This decision resulted from a comprehensive review, finding that robust underlying market conditions supporting each business will allow them to move forward with appropriately strong balance sheets.
We view the separation as a positive move, as both can focus on their core business and seek further expansion. Incitec Pivot Fertilisers will be a leading fertiliser company in the soil health sector, with an extensive and vertical integrated network supporting the East Coast market. It is positioned to capitalise on leading a step-change in sustainable fertiliser and precisions agriculture, as well as developing partnerships for world class fertiliser sourcing, including the potential Perdaman arrangement.
Dyno Nobel will be a global leader in technical explosive solution, with solid margins and advantage IT industry exposures. It features strong customer relationships and partnerships and offers an attractive technology backed growth outlook.
‘We believe that creating two market leading companies that are well capitalised, with strong technology, clear strategies for growth and listening to customers will unlock significant value for our shareholders,” said CEO Jeanne Johns.
1H22 Result Review
Incitec Pivot’s demerger plan came as it reported a record half-year profit. For the six months ending March 31, the company posted a 47.8% increase in its revenues at $2.5 billion and a higher jump of 955% in its net profit after tax (NPAT) to $384.1 million, buoyed by improved volumes in the Dyno Nobel Americas business and the upswing in the fertiliser business.
Shareholders will receive a fully franked 10 cents per share interim dividend, up from the 1 cent payout for a year-earlier. The dividend payout represents 51% of NPAT, in line with the company’s dividend policy and reflecting improved business performance. On this front, we expect to see continuous growth in dividends in the future.
Source: Incitec Pivot (ASX:IPL)
More importantly, the group’s balance sheet was strengthened with total financial indebtedness improved by $245 million, despite seasonal investments in trade working capital due to commodity price movements and lower utilisation of trade working capital. The net debt to EBITDA ratio was 1.0x, down from 2.1x on the prior corresponding period (pcp). Management predicted that the seasonal cashflow skews to 2H will be more pronounced for 2022
Source: Incitec Pivot (ASX:IPL)
Moving to operating performance, both Dyno Nobel and Fertilisers delivered excellent results during the half. Dyno Nobel Americas (DNA) reported EBIT of $252 million, up $220 million on pcp, supported by improved volumes and technology driven margin improvements. Waggaman plant production and efficiency were strong and outperformed expectations during the half. DNA sales improved across all sectors, especially in coal where volumes mined increased 17% on pcp.
Source: Incitec Pivot (ASX:IPL)
Meanwhile, Dyno Nobel Asia Pacific delivered EBIT of $79 million, up 13% on pcp, with Electronic Detonators sales up 20% and premium emulsions up 16% on pcp. The acquisition of Titanobel gives Incitec Povit additional expertise and people capability to serve high quality markets and customers in Europe and Africa, with growth being driven by technology and a focus on future facing minerals.
Fertilisers Asia Pacific’s EBIT increased to $257 million, up $237 million on pcp, mainly driven by the value of the broader commodity prices upswing, and we see this price momentum continuing. While the Gibson Island plant successfully uprated AdBlue production to deliver into a shortage in the Australian transport industry during the half. The acquisition of Australian Bio Fert was a milestone step on Incitec Pivot’s soil health strategy.
Summary
We retain our positive view on the commodity prices momentum, and it will likely last for several years, which will benefit the seperated explosives and fertiliser businesses. We have already seen Incitec Pivot (ASX:IPL) repair its balance sheet and quite quickly.
We view the separation as a good move, as both companies can focus on their core business and avoid the risks associated with the other part of the business. Dyno Nobel and Fertilisers are already two wholly separated businesses with different markets. They are both well-positioned in their key markets to capture value from the commodities upcycle. In the long-term, they participate in the megatrends of decarbonisation and electrification that will drive growth in the mineral and agricultural sectors.
Overall, we view Incitec Pivot (ASX:IPL) favourably, and it will remain held in the Fat Prophets portfolio.
While awaiting the details of the separation, we continue to recommend Incitec Pivot (ASX:IPL) as a BUY for Members without exposure.
