IPL: Are there fertile grounds ahead?

Incitec Pivot (ASX:IPL) is a global manufacturer, exporter and distributor of industrial explosives, fertilisers, and chemicals primarily to the agriculture, mining, and construction industries. The current listed entity has come about due to a number of business acquisitions over many years.

The origins of the fertilisers business are traced back to 1919. Pivot Limited and Incitec Fertilisers merged in 2003 to create IPL, this was the same year that IPL listed on the ASX, and three years later they purchased Southern Cross Fertilisers. With the final piece of the puzzle falling into place in 2008 with the acquisition of USA based Dyno Nobel Limited.

IPL breaks their operations up into two geographical segments Asia Pacific (APAC) and Americas. The APAC region comprises two businesses: Fertilisers APAC and Dyno Nobel APAC (NDAPAC). Their fertiliser business manufactures and sells fertilisers on the east coast and to the export market and is Australia’s largest domestic manufacturer and supplier of fertilisers by volume. It also manufactures, imports, and sells industrial chemicals to the agricultural sector and other industries. Their DNAPAC business manufactures and sells industrial explosives and related products and services to the mining industry mainly in APAC, Turkey and France. The Americas region comprises of Dyno Nobel Americas (DNA) which manufactures and sells industrial explosives and related products and services to the mining, quarrying and construction industries in the Americas (Canada, Mexico and Chile) and explosive initiating systems to businesses in Australia, Turkey and South Africa. It also manufactures and sells industrial chemicals to the agricultural sector.

IPL’s APAC region is the largest business segment contributing $3.6bn (with $2.2bn of this coming from their APAC fertiliser business) to FY23 revenue of $5.4bn, while the Americas region contributed $1.7bn to FY23 revenue.

FY23 has seen a material change to IPL’s business with the board and management confirming the sale of their Waggaman ammonia plant (which forms part of their Americas business) will proceed on the back of regulatory approvals this month for $2.5bn. IPL have also expressed interest in either selling or demerging their APAC fertiliser business and are actively exploring a demerger process and fielding enquiries for possible suitors to see which option offers the most value to shareholders. Easing fertilizer prices in recent times have slowed this process up somewhat.

But with such big changes afoot, some investors may be wondering whether now is the time to consider the business for a possible investment?

The IPL board is planning to reward shareholders (and no doubt themselves) with the windfalls from the sale of the Waggaman plant and have reaffirmed they will continue with a previously announced $400m on-market share buy-back and, subject to shareholder approval, will return $1bn of capital to shareholders from the Waggaman sale via a pro-rata $500m capital return and a further on-market share buy-back of $500m.

So as any potential investor in IPL can see, there is still more to transpire here with the company looking to streamline what has become quite a complex business by offloading parts of its ammonia and fertiliser production and focus primarily on their Dyno Noble explosives and technology businesses in the US and AUS.

StockRank:

Over the past 2-3 years IPL has benefited from the global increase in the demand for thermal coal and fertiliser due to COVID related supply chain disruptions and export bands on Russian fertiliser and energy. These events resulted in record price for IPL’s commodities in FY22 and despite a softening of prices in FY23 they have still remained high compared to historical averages.

2019

2023

This resulted in a record financial performance in FY22 with another strong performance in FY23 and as a result their StockRank and QVM figures have improved significantly. Until their asset sales, capital return and share buy-backs are completed; I am putting less emphasis on these numbers than I usually would as they reflect the current business structure, which will most likely change significantly.

The stocks was even included in the 2023 AUS & NZ NAPS portfolio, however one would argue they have failed to capitilise on their underlying strength. 

Financials:

I’m not going to beat around the bush here, apart from IPL’s standout performance in FY22, their financial performance has been mediocre at best over the past 10-years. During this time IPL’s share price has gone sideways, and this has been due to the company paying 53% of profits out as dividends and then relying on debt and equity to help fund the company.

By this I mean since 2014, IPL have generated $3.2bn in profits and paid out $1.7bn in dividends with total debt of $1.9bn at the end FY23. If we add total debt and dividends paid, we get $3.6bn which is nearly the same as profits generated since 2014; highlighting how they have used debt to fund dividends. Also contributing to the poor share price performance is IPL’s anaemic profitability ratios, apart from FY22’s standout performance.

If this is the best IPL can do with the assets they have, it makes sense to split the company up and realise value for shareholders by selling the assets. For me, once the Waggaman and Fertiliser businesses have been sold/demerged, and hopefully debt paid off with excess capital returned to shareholders, there needs to be a material improvement in their profitability ratios which will indicate that the new business structure is more profitable than the previous one and is creating value for us shareholders.

Liquidity and Ownership:

With 99.6% of the 1.9bn shares on issue classified as free float and major shareholders only accounting for 27.32% of shares outstanding, an investor will have no issues buying or selling stocks in IPL. It is also worth remembering, that there is a potentially $900m of capital allocated for share buy-backs. This is unlikely to impact share liquidity but will concentrate the current share structure.

Outlook:

After the asset sales currently underway, IPL will mainly comprise of their Dyno Nobel entities. Therefore it makes sense to focus on the outlook for these entities.

According to IPL, Australia is the World’s largest industrial explosives market with DNAPAC the second largest industrial explosives distributor in Australia by volume and their DNA business also the second largest industrial explosives distributor by volume in North America.

In FY23 IPL managed to increase revenue, earnings, and margins for DNAPC, while DNA was down on all three measures compared to FY22. However, the explosives segment of DNA did improve for all three measures and will be the primary driver of DNA after the Waggaman plant is sold.

IPL have not provided any concrete earnings or profit guidance but sees demand remaining strong for their products and services. They expect positive earnings momentum from the second half of FY23 to carry over into FY24. Also of note is the larger role IPL sees for their explosives services, R&D and technology products playing in the future.

Source: FY23 Results Announcement 13/11/2023

Conclusion:

Given the average share price performance over the last 10-years driven by average net returns, it makes sense for IPL to spin off assets and realise value for shareholders and focus on the strong market position they hold with their Dyno Noble entities.

Post asset sales, capital return, and share buy-backs, IPL should be a much leaner and more profitable business capable of creating value and capital growth for shareholders. But I would blame any new investor in IPL wanting to hold off until asset sales are complete, and the new business structure is performing better than currently before considering a position.

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