telegraph article, page-2

From Intersuisse today:

Incitec Pivot Limited IPL Tuesday 06 May 2008

Strong interim, can it continue?

We see IPL as very well placed, with Dyno adding

Recommendation: Accumulate

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, having integrated production and well-developed
financial management. IPL will likely merge with Dyno Nobel (DXL) mid 2008
to form a fertiliser and explosives powerhouse. This will give investors
exposure to key agri-business and resource inputs. The main risk is for how
long fertiliser prices will stay at record levels. Further upside will come from
cost savings after optimising DXL.
The Result
($m) Half to Mar31 H1 FY07 H1 FY08 % Change
Trading Revenue 543.6 749.3 37.8
EBITDA 102.1 269.0 163.4
Pre-Tax Profit 67.5 233.3 245.6
NPAT Adjusted 49.6 171.1 245.0
Net Operating Cash Flow -53.2 21.0 139.5
EBITDA Margin 18.8 35.9 17.1
EPS Adjusted, ¢ 98.4 339.3 245.0
Franked Dividend, ¢ 69.0 204.0 195.7
Event
�� The interim result was unsurprisingly solid, given surging fertiliser prices.
Is there more upside after IPL’s price trebling?
�� EBITDA gained 163% to $269m. Interim net operating cash flow is
typically soft. It improved from negative $53m to a mild positive $21m. The
interim franked dividend was also trebled to $2.04, payable on 2 July.
�� Average DAP prices fortunately doubled to over $730/t – rising 125% in
US$ to US$658/t. Overall, group prices rose 19%.
�� Working capital continues to be rigorously managed, falling from 20% to
16% of rolling twelve month sales.
Impact
�� Key variable is the DAP price. IPL effectively lifted its FY08 EBIT forecast.
It now assumes the industry’s second half DAP price forecast of
US$1,100/t, up 26% from its March forecast. This will lift FY08 EBIT 19%
to $850m, compared to FY07’s $313m. Offsets are the stronger A$ and
sulphur input price. IPL expects the DAP price to continue relatively strong
at least until new Gulf production begins from 2010.
�� Group volume only rose 5%. Ever-troubled Mt Isa had production hiccups
in the sulphuric acid plant. Southern Cross phosphate output fell back
around 20%. Nevertheless, Southern Cross contributed half the EBITDA.
�� IPL valuation depends on whether DAP and urea prices can remain as
high and for as long as base metal prices. IPL will likely optimise well the
integration of DXL’s fertiliser and explosive manufacturing plants.
�� DXL shareholders vote on 22 May with the merger probably completed by
late June. IPL has diplomatically still to announce whether to proceed with
Moranbah and the cost savings from merging. It reported cost savings
from its own efficiency program of over $140m. Gearing will roughly treble
post-merger, but FY09 combined EBIT will cover interestsome nine times.
Recommendation Impact
Long Term Accumulate. While prices may not remain so favourable in the
longer term, they continue to boost performance and options will increase with
Dyno Nobel. Despite the price rise, IPL remains on a sound P/E rating