Incitec Pivot: Imminent Growth in Explosives Earnings Could Lift Sentiment

Shares in no-moat Incitec Pivot IPL trade below fair value. We think investor reaction to negatives excessive and expect an imminent turnaround from explosives. Further, Incitec can look forward to growing bulk commodity volumes, increasing battery metals mining, and infrastructure-related spending including renewables to underpin growth.

Earnings from the core explosives business have slipped since fiscal 2019. Incitec announced some potentially unsettling news, including uncertainty around a fertilizer demerger/sale, leadership changes, and reduced gas under the ENI supply agreement to Phosphate Hill.

However, explosives re-contracting is being undertaken in a far tighter market portending improved earnings. Easing labor and supply chain tightness are additional underpinners.

Our Incitec forecasts are readily achievable. Our unchanged AUD 3.50 valuation hinges on two key assumptions: explosives earnings recommence moderate growth; and fertilizer earnings retreating to reasonable normalized levels. The explosives element is the more important having composed around 60% of continuing business EBITDA over the past decade.

We anticipate an impending turnaround in fortunes for explosives. Explosives re-contracting has already seen impressive price increases in a tight market. We estimate first-half fiscal 2023 average ammonium nitrate prices were 53% higher than fiscal 2018. But extraordinary cost escalation fueled by Russia’s invasion of Ukraine and rising energy prices have so far more than countered.