Incitec Pivot Limited (IPL) Technical Update

Submitted by Jim Thesiger on 6 May, 2008 - 01:34

Incitec Pivot Limited (IPL) has a reiterated Buy stock recommendation and a $208 share price target from Australian stock analyst Macquarie Research Equities.

Incitec Pivot Ltd: More fuel in the tank II – If you like cash…

Staying bullish — We increase our fertiliser price and earnings forecasts materially. So long as food price inflation remains a concern, fertilizer producers should continue to enjoy unprecedented pricing power in a supply constrained market. We reiterate our Buy, with target price increased to $208.

Valuation — Our target price is based on an 80% PE rel to the All Industrials on 12 month forward earnings ($196) plus $19/share for re-gearing.

Revised forecasts — Revisions to our DAP price forecasts (now US$1200/t for FY09e) have driven 15-35% increases to our earnings forecasts for FY08-FY10e. See inside for earnings bridges.

Excess cash — IPL is set to generate $50/share (present value) of free cash flow over the next five years (Figure 5). This adds to a mid-cycle earnings base which we view as having increased six-fold since May 2006.

Benefiting from food price inflation — With food price inflation set to remain a concern for the foreseeable future, fertiliser producers (particularly DAP and potash) should remain in a position of unprecedented pricing power. An optimistic view of global grain market supply response suggests it will take at least three years to restore the global grain deficit.

Result preview — IPL reports its 1H result on 5 May. We forecast core NPAT of $154m (27% of our full year forecast) and DPS of 183 cents.