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Goldman Sachs reduces IPL target from $3.84 to $2.95 based on oversupply of grains and low fertilizer price.

COMPANY UPDATE
Incitec Pivot Ltd. (IPL.AX)  - Neutral
More downgrades as soft commodity prices weaken; Neutral

What's changed
Sharp declines in soft commodity prices and growing global inventories in
wheat and corn have led us to reduce our expectations for fertiliser prices
in the near term, with our FY17-18 Urea and DAP price assumptions
declining by ~US$50/t and ~US30/t respectively. The impending start-up
of IPL’s new 800ktpa Louisiana ammonia plant (mid CY16) will also result
in the company’s earnings being more leveraged to US ammonia prices
and, with some 88% of US ammonia used for fertilisers in 2015, the weak
soft commodity outlook is also likely to weigh on ammonia prices. As a
result, we have cut our assumption for IPL’s FY17 and FY18 ammonia
spread from US$220/t to US$185/t and US$201/t respectively. Note, when
IPL management announced the construction of this plant in April 2013,
spot ammonia spreads were ~US$425/t, although we believe IPL would
have likely assumed a level of US$200-250/t in their investment decision.

Implications
Our FY16/17/18 EPS estimates for IPL have been cut by 6.3%/18.8%/17.5%
respectively. Note, only minor changes have been made to our FX
assumptions which for the A$/US$ are 0.726/0.674/0.689 for the periods in
question. With a 1c change in the A$/US$ having an estimated 3% impact
on our FY16 estimates (and even higher in the out years once the
ammonia plant is fully ramped up) all else equal, continued A$ strength
represents further near-term earnings risk.

Valuation
Our 12-month target price falls to A$2.95 (previously A$3.84).