Incitec Pivot Ltd (ASX: IPL)

Incitec Pivot Ltd is an Australian-based global entity specialising in the production and distribution of industrial chemicals and fertilizers.

Recommendation Rationale – SELL at AUD 2.90

• Net Losses: During H1 FY24, IPL reported a net loss after tax including individually material items (IMIs) of AU$148 million against a profit of AU$354 million in H1 FY23. Primarily, losses incurred due to discontinuation of Waggaman and closure of fertiliser manufacturing at Gibson Island, Queensland.
• Decline in Return on Invested Capital (ROIC): During H1 FY24, ROIC including goodwill stood at 5.1% while it was 12.8% in H1 FY23.
• Overvalued Multiples: On a forward 12-month basis – key trading multiples (EV/EBITDA, Price/Earnings, and Price/Cash Flow) are higher than the average of Basic Materials’ sector.
• Commodity Price Fluctuations: Incitec Pivot’s revenue and profitability are heavily influenced by the prices of key commodities such as ammonia, urea, and phosphates. Fluctuations in these commodity prices can impact margins and financial performance.
• Regulatory and Environmental Risks: As a major producer of fertilisers and chemicals, Incitec Pivot faces regulatory risks related to environmental regulations, safety standards, and industry-specific compliance. Changes in regulations or increased scrutiny can lead to higher operational costs or fines.

IPL’s Daily Price Chart

(Source: REFINITIV; Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY Sep'25E) (Illustrative)

IPL is expected to trade at a premium since it has returned around AU$500 million of surplus capital to shareholders (through capital return and special dividend) and plans to launch on-market buy-back program. The following peers have been considered for conducting valuation: Amcor PLC (ASX: AMC), Downer EDI Ltd (ASX: DOW), and Aurizon Holdings Ltd (ASX: AZJ).

Given its current trading levels, financial decline, and risks associated, it is prudent to exit at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the closing market price of AUD 2.90, as of 26 July 2024.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is 26 July 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Dividend Yield may vary as per the stock price movement. 

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: In general, it is a level to protect further losses in case of any unfavourable movement in the stock prices.