Incitec Pivot Limited (IPL) Update

Submitted by Jim Thesiger on 6 May, 2008 - 12:31

Incitec Pivot Limited (IPL) has a reiterated Buy stock recommendation and a $213 share price target from Australian stockmarket analysts from Citi.

Incitec Pivot Ltd: Another Solid Result

Staying bullish — Core NPAT of $171m was 11% ahead of our forecast and 2% ahead of consensus. EBIT upside of $10m was driven by a stronger than expected trading profit. We reiterate our Buy recommendation, with target price increased to $213.

Valuation — Our target price is based on an 80% PE rel to the All Industrials on 12 month forward earnings ($194) plus $19/share for re-gearing.

Revised forecasts — Scenarios presented suggest IPL is on-track to deliver EBIT of $850m if the DAP price averages US$1100/t in the current half, with upside to $915m if DAP averages US$1225/t (ie. spot). This range represents 7-17% upside at NPAT level from pre-result consensus. We increase our FY08e earnings by 9%, factoring in US$1200/t average DAP price in 2H.

Excess cash — IPL is set to generate $50/share (present value) of free cash flow over the next five years (Figure 4). 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 in a supply constrained market. An optimistic view of global grain market supply response suggests it will take at least three years to restore the global grain deficit.

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