Incitec Pivot (IPL) Today, the global fertiliser and explosives manufacturer, reported its first-half 2023 results, which were weaker than sell-side expectations, but ahead of our expectations. HNW Equity and Income  Portfolio hold a 3% weighting to IPL.

Key Points:

  • Solid Profits:  First half profit $552 million off -3% from the record 1H22, which benefited from surging fertiliser and ammonia prices due to the Russian invasion of Ukraine. Compositionally, commodity prices and higher gas prices negatively affected the Australian fertiliser business. This was mostly offset by the 42% increase in operating profit from the explosives business, driven by higher volumes of ammonia produced from improved plant reliability. IPL’s profits are always weighted towards the second half, with the East Coast wheat crop planted in May.
  • Share Buyback: As well as providing a 10-cent dividend this half (in line with last year), IPL will continue to move ahead with the previously announced $400 million share buyback, which is looking to be completed before August.
  • Balance Sheet solid: net debt/EBITDA down to 0.8x from 1x in 2022 with a healthy 16x interest cover. Cash flow was a highlight up $227M on 1H22 due to declining working capital.
  • Why is the stock down?: Fertilisers were below expectations as farmers held off buying in March due to heavy rains, and DAP prices retreated from early 2022 highs, something many sell-side analysts did not include in their numbers. Also, as always, many in the market forget the second half weighting on earnings for IPL, which saw the share price fall by a similar amount in March 2022 before recovering during the year.
  • Strong Outlook: Most of the Australian cropping season doesn’t get captured in the first-half results for IPL. The fertiliser side of the business is set to have a strong second half of the year due to forecasted favourable Eastern Australian agriculture conditions. Explosives earnings will also be higher in the second half as long-standing contracts have been repriced upwards to reflect higher ammonia nitrate prices.

CEP Strategy:  IPL is Australia’s largest manufacturer of fertilisers, supplying around 50% of the nation’s fertilisers. Additionally, IPL is the world’s second-largest manufacturer of explosives that are used in mining, quarrying and construction. IPL takes advantage of lower US natural gas prices via their new ammonia plant in Louisiana. IPL offers us exposure to a well-run global chemical company, benefiting from US shale gas, improving demand for Australian agricultural produce and a falling AUD. IPL is one of the last listed agriculture companies on the ASX, and HK-based activist investor Janchor now owns 9% of the company. IPL trades on a PE of 8x with a 7% yield

IPL fell 7% to $2.94.