Elevated prices for fertiliser and ammonia and an expected recovery in explosives put Incitec Pivot in a strong position despite the impact of Hurricane Ida
-Hurricane Ida to impact Incitec Pivot's earnings for the final month of FY21
-Elevated gas prices supporting ammonia markets globally
-Waggaman needs to run smoothly for some time to instigate a re-rating
As the financial year closes for Incitec Pivot ((IPL)), another difficulty to surmount has come in the form of Hurricane Ida, which is a reminder of the many issues that have plagued operations at Waggaman, the company's ammonia plant in Louisiana.
The plant was shut down on August 28 in anticipation of the hurricane to protect against damage, and the re-start has been awaiting the restoration of high-voltage industrial power.
The total outage is anticipated to be four weeks from the date the plant was shut down, which correlates with the final month of the company's financial year and results in another material downgrade to earnings estimates.
The timing is unfortunate, given the advantage lost from an historically high ammonia price, and Morgans downgrades forecasts for FY21 while keeping FY22-23 unchanged. Macquarie notes the balance sheet is in good shape since a capital raising in 2020 and gearing should have fallen in the second half, consistent with normal seasonal trends.
The broker also suspects the market will look through the interruption, as Waggaman has performed much better recently. The plant has been running at nameplate capacity since the end of May and has not sustained any damage to its structure from the hurricane. Macquarie estimates the last four months (June-September) of FY21 will have averaged 93% utilisation.
There will be two more turnarounds in the company's plants, at Cheyenne and Phosphate Hill during FY22, after which there will be a breather and the next cycle will not occur until FY25.
Brokers also concludes there is material upside from this point if fertiliser prices hold up and no further manufacturing issues eventuate. The loss in EBIT terms is -US$28m while the impact on net profit is -US$21m. Moreover, the plant now needs to successfully re-start hence, as Macquarie points out, there is some residual risk.
Morgans downgrades its estimates to a lesser extent than the headline indicates, to account for higher fertiliser prices. Moreover, there is material upside if prices hold around current levels. For FY22 the broker assumes an average diammonium phosphate (DAP) and ammonia price of US$470/t and US$420/t versus spot at US$632/t and US$615/t, respectively. As UBS notes, the latter (Tampa spot ammonia price) is up 140% over the year to date.
The broker observes most market commentators expect fertiliser prices to remain high until at least the first quarter of 2022, amid strong demand, supply disruptions and rising raw material costs. Morgans also expects a recovery in Incitec Pivot's Asia-Pacific explosives business and a larger cotton season during FY22 will provide benefits in terms of fertiliser sales.
Gas costs are also surging in the UK and Europe, underpinning the ammonia price. As Macquarie points out, US gas prices may be surging but Europe has risen more because of a very tight LNG market, and this provides a favourable margin spread for US nitrogen producers.
Morgan Stanley adds an observation that urea and DAP prices in the US have increased in the wake of Hurricane Ida while Chinese DAP prices are unchanged. Yet, as UBS reflects, DAP prices in Asia are still up 70% in the year to date.
Morgans assesses the fundamentals for Incitec Pivot are attractive compared with the broader market and competitor Orica ((ORI)), yet recognises the Waggaman plant needs to run properly for an extended period of time in order for the market to become comfortable and re-rate the stock.
Macquarie agrees Incitec Pivot is trading at a large discount to Orica on FY21 and FY22 multiples, with the main risks being further problems with manufacturing, or a slump in fertiliser prices.
UBS considers the stock highly leveraged to ongoing strength in global agriculture and believes its forecasts of 30% EBIT growth in FY22 will be underpinned by favourable fertiliser pricing along with a better manufacturing performance and resilient explosives markets.
Tight supply amid a likely reduction in DAP exports from China is also a feature and elevated global gas prices will support ammonia markets in the absence of new merchant ammonia capacity.
FNArena's database has seven Buy ratings for Incitec Pivot with a consensus target of $3.06 that suggests 11.5% upside to the last share price.
See also, Incitec Pivot Re-Rating Dependent On Waggaman on May 19, 2021.
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