LA Private

Incitec slammed after on the nose half-yearly

Incitec Pivot (ASX:IPL) shares fell 10% at one stage yesterday after it revealed a weak performance in its fertilisers business for the six months to March 21.

The fertiliser and explosives maker tried to offset the weak result by claiming a “positive earnings skew in the second half” thanks to a better outlook for explosives and agriculture in rural Australia.

First half dividend was left steady at 10 cents a share, which is always a good sign of the real view of a board about how the company is placed after a weak half.

But the real story was underlined by the board deciding to start the previously announced $400 million buyback which has been hanging around for a while.

Buybacks are supposed to reward shareholders but they are also designed to help companies when they expect some sharemarket weakness.

And once that is finished the company said the “Board will consider further capital management initiatives aligned with its capital allocation framework.”

But then it should have over $1 billion or more to play with from the sale of its Waggaman ammonia plant in the southern US for $US1.675 billion (or more than $A2.5 billion).

IPL said its statutory net after tax profit of $354 million was down 8% from $384 million in the first half of 2021-22.

Revenue rose 20% or $507 million to $3.055 billion, thanks to a 27% rise in sales in the explosives business and an 8% gain in fertiliser sales.

And yet earnings dipped after that strong top line.

No wonder, then, directors were keen to pitch the better second half line in the release, saying:

“IPL expects a positive earnings skew in the second half for its Explosives businesses. Favourable agricultural conditions are expected in Eastern Australia for the remainder of the financial year with Fertiliser earnings, excluding impacts from foreign exchange and commodity price movements, forecast to be positively skewed to the second half. IPL remains focused on operational performance and strategy execution.”

Based on the 28% rise in explosives revenues, that was the star turn in the half year.

The company said EBIT its Dyno Nobel Americas business jumped to $US260 million from $US182 “underpinned by improved operating performance at the Waggaman ammonia plant and stable explosives results despite severe winter storms and heavy snowfall temporarily impacting customer demand.”

Dyno Nobel Asia Pacific had a flat half with EBIT of $79 million unchanged from a tear ago and “included underlying earnings growth of over 10% with growth in technology sales and excellent performance from the international businesses. This underlying growth was offset by the impacts of unusually wet weather and the previously announced impact of the Gibson Island closure.”

The company’s Fertilisers business was the weak point with EBIT of $108 down sharply from $257 million in the first half of 2021-22..

“The main drivers of the result were lower commodity prices and the previously announced temporary increase in the cost of gas at Phosphate Hill. Distribution earnings were reduced by severe rain and flooding which significantly impacted volumes in the spring and summer planting seasons.”

“The significant drop in commodity pricing has also impacted volumes in the first half with customers choosing to defer purchases to take advantage of the decrease,” IPL said on Wednesday.

So what will this result do to plans to split the company into two businesses based on explosives in one and fertilisers in the other?

The weak results in the latter suggests management has a lot of work to do to rightsize it, while the explosives business probably knows that its good times could have peaked if the global economy is slowing and with that demand for key commodities like metals, iron ore and coal.

Reflecting those concerns about the split and the performance of the fertiliser business, IPL shares sold closed down 7.8% at $2.94 – despite the promise to kick off the big buyback.