Investment Rationale IPL both produces and distributes East Coast fertilisers, expanding upstream after former parent Orica sold its 70% mid 2006. Competitive strengths include sound strategic planning, integrated production and well-developed financial management. IPL merged with Dyno Nobel (DXL) mid 2008 to form a fertiliser and explosives powerhouse. This gives investors exposure to key agribusiness and resource inputs. The main risk is fertiliser and explosive prices: having been at record levels, they have dropped back sharply.
Further upside will come from cost savings after optimising DXL and output growth with the Moranbah plant in particular.
Events The share chart reflects global movements in prices of fertiliser and producers as demand for soft commodities gave way to recessionary concerns. For IPL in recent months there have been several positive price drivers: • The acquisition of Dyno Nobel was successfully completed • A decision was made to build the Moranbah plant, expected to generate an 18% EBIT return on net assets in year four or 2014 • A share split of 20 for 1 was approved at an EGM on 5 September and effective from 16 September. This has enhanced share liquidity and appeal to retail investors. Today a dividend reinvestment plan (“DRP”) was introduced as foreshadowed by at the EGM • On 18 September IPL entered into a new three-year syndicated facility of $1.68bn with its key relationship banks. IPL was confident about the early refinancing of the balance of its 365-day bridge funding for DXL. Before the Dyno Nobel acquisition, the interim 1H08 results were strong. EBITDA gained 163% to $269m. The interim franked dividend was trebled. The stimulus was DAP prices, which on average doubled to over $730/t – rising 125% in US$ to US$658/t. IPL continued to show its strong management and financial control. Working capital is rigorously managed. Cost savings from its efficiency program Project Tardis reached over $140m. The $935m ammonium nitrate complex at Moranbah, Queensland, is already under construction, originally commenced by Dyno Nobel, and expected to be in beneficial production in the first quarter of calendar 2011.
Impact • Key variable in profitability is the DAP price. This continued to rise to US$1,100/t, but has now fallen back over 30%, still higher than a year ago. We expect strong FY08 results on 17 November, but subdued guidance although profits and EPS will increase in FY09 with the developments noted here. Our figures are below consensus. • We expect IPL to optimise effectively the integration of DXL’s fertiliser and explosive manufacturing plants. • Moranbah construction is contracted and the long-term gas supply fixed. Gearing is quite high post-merger, but FY09 combined EBIT will cover interest some nine times.
Recommendation Impact Producing both fertilisers and explosives, IPL is focused on trends that should continue despite a global slowdown: the needs for food and the development of China, India and other growth areas. Fertiliser prices have tumbled from record highs, but so have producers’ share prices including IPL’s, despite much of its costs being in the cheaper A$. Key DAP, urea, ammonia, sulphur and potash prices are expected to remain above those of a year ago. While grain prices have also fallen, global corn and wheat inventories are at low levels. We believe these cautions are fully reflected in IPL’s price with an attractive P/E, solid franked dividend and proven management. Current prices are an opportunity to Buy into a major long-term growth stock.. A leading ‘agricultural’ investment with a positive outlook as Dyno Nobel integration opens up new production synergies and adds growth in explosives.
IPL Price at posting:
$2.54 Sentiment: Buy Disclosure: Held
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