Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria

Business Strategy & Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertilizer business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertilizer pricing power from its dominant market share in eastern states, but it is too small to influence global prices. The fertilizer business does not possess an economic moat. Explosive earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Given these dynamics, the demand for ammonium nitrate is to continue growing. However, growth is likely to be uneven and subject to cyclical changes in demand for commodities. Significant increases in capacity have led to near-term oversupply of ammonium nitrate on the east and west coasts of Australia. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021.

In Western Australia, Orica has commissioned a new plant in the Pilbara with Yara of Norway. Incitec Pivot sources its ammonium nitrate from Wesfarmers in the west, so margins will be overly hurt by the oversupply. Incitec Pivot’s explosives business is strategically short ammonium nitrate, or AN, production capacity by around 200,000 tonnes in a long-capacity market. A superior product offering is essential to facilitate this strategy, with demand supported by flexible third-party agreements that are footprint-logical. Expansion at Moranbah in the east would only be considered after markets come back into balance.

Financial Strengths

Group net operating cash flow increased 68% to AUD 1.09 billion in fiscal 2022. This allowed net debt to fall by 7% to AUD 949 million. Gearing is modest at 15% and net debt/EBITDA just 0.5. Low debt with a strong fiscal 2023 cash flow forecast creates optionality for additional capital management. Debt ratios are well below the company’s 1.0 to 1.5 net debt/EBITDA target range. This places Incitec in a sound position to navigate the conversion of Gibson Island to import only and to explore new opportunities like green hydrogen manufacture. That and/or capital management post fiscal 2022. There is an expressed concern over capital misallocation in the recent past, including on-market share buy-backs. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy. The equity capital raised in fiscal 2020 increased the company’s liquidity and supported a continued investment grade credit rating. Over the long run, Incitec Pivot to return approximately 50% of earnings to shareholders through dividends, which is a reasonable payout ratio.

Bulls Say

Investors enjoy bumper dividends at peak cycle times.
Continued growth of the explosives business will reduce earnings volatility.
Over the longer term, explosives earnings are favorably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.

Company Description

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. It is estimated its share of the global commercial explosives market at about 15%. Explosives contribute 80% of EBIT. Incitec Pivot is also a major Australian fertilizer producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

(Source: Morningstar)

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