For all IPL holders for which I am one Volatility Index: High Recommendation: Outperform
Price 21 Jan 10 $3.37
Event
We revisit our assumptions for Incitec Pivot (IPL) and upgrade our Financial Year 2010 earnings following recent strength in diammonium phosphate (DAP) prices.
Impact
DAP spot prices are still rising with US$450/t in sight. DAP spot prices have risen in recent weeks to US$425/t (free on board (FOB) Tampa) with suppliers seeking US$450/t for new spot business. The rally has been driven by strong Chinese imports in Fourth Quarter and strong demand recovery from US and Latin America. We understand that a number of global producers are fully committed until March, which should see DAP prices well supported at current levels in the near term and with potential to move higher.
Global DAP prices in the March quarter will determine Australian DAP prices for the upcoming winter crop season, which are set on an import parity basis. IPL exported 58% of DAP production in Financial Year 2009 due to the decline in domestic demand; we expect a more normal 40% mix in Financial Year 2010 as local demand improves. Our trade feedback indicate A$ retail DAP prices have continued to follow global prices up to around A$650-700/t, and IPL has reportedly sold out of stock following stronger than expected local buying. With this in mind we have increased our average realised DAP price assumption in Financial Year 2010 to US$400/t from US$350/t. There is a mix effect within this as IPL has already exported around 125kt of DAP at US$310/t in Fourth Quarter 2009. We assume a US$370/t First Half 2010 average DAP price and US$418/ Second Half 2010 price.
Commentary from global peers more positive. Mosaic recently released Second Quarter 2010 results, reporting a sequential improvement in earnings on the back of an increase in phosphate volumes and prices. Management commented that the phosphate market is expected to remain tight, at least in the First Half, due to extremely low producer stocks, strong domestic US and offshore demand and limited exports from China in First Half 2010. Additionally, the non-integrated cash cost for DAP is now US$400/t, up from US$350/t due to rising sulphur and phosphoric acid costs. The recent pullback in soft commodity prices is negative but we see the above positive factors continuing to support DAP prices over the next few months.
Earnings and target price revision
We have increased our Financial Year 2010 and Financial Year 2011 earnings per share by 21% and 2%, reflecting a higher DAP price assumption in Financial Year 2010 (US$400/t) and higher DAP freight rates also boosting import pricing. Our Financial Year 2010 earnings per share is 15% above consensus. Our target price has been increased to $4.00 (from $3.61).
Price catalyst
12-month price target: $4.00.
Catalyst: Moranbah restart expected First Quarter, First Half result in May
Action and recommendation
We maintain an Outperform rating with a higher target price of $4.00 based on Financial Year 2010 sum of parts. Our discounted cashflow valuation is $3.96.
AEV Price at posting:
42.9¢ Sentiment: LT Buy Disclosure: Held
