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Morningstar | It’s Not Threes It’s Fours; Another Fiscal 2019 Earnings Downgrade for IncitecPivot.

Our AUD 3.00 per share fair value estimate on no-moat IncitecPivot is unchanged. That’s despite reducing our fiscal 2019 EPS forecast yet again, this time by 9% to AUD 0.21. Our last note said bad news tends to come in threes, and IncitecPivot had had its three. Apparently not, with still more issues plaguing troubled operations across the globe. Nevertheless, we stubbornly hold to the view the ramifications are not long term in nature, with much in the latest imposts coming down to extreme weather.

Since December last year, and immediately prior to the latest announcement, IncitecPivot’s confessional was already brimming. It had owned-up to a combined AUD 160-180 million in EBIT detractions, including separate gas supply issues to its Gibson Island, Phosphate Hill and St Helens, Oregon plants for a combined AUD 17.5 million, unplanned downtime at the Louisiana ammonia plant in the U.S. for AUD 25 million and Phosphate Hill again for AUD 20 million, and a one-in-one-hundred-year flood of the rail line between Townsville and Phosphate Hill cutting a further AUD 100-120 million.

Now add an additional net AUD 36-56 million for the latest stumbles, including a second shut-down of the Louisiana plant in late March for AUD 23 million, lost fertiliser volumes in Eastern Australia due to dry weather of AUD 20 million, permanent closure of single super phosphate manufacturing in Victoria for AUD 13 million; and only partially offset by Queensland flood costs coming-in favourably towards the low end of the previous guidance range or AUD 100 million. We reduce our fiscal 2019 EBIT forecast by a further AUD 41 million or 7% to AUD 563 million on the latest announcement, bringing the total retracement since our November 2018 note to AUD 200 million or 26%. Our fiscal 2020 EBIT and EPS forecasts are unchanged at AUD 713 million and AUD 0.29, respectively.

We cut our fiscal 2019 DPS forecast by 9% to AUD 10.5 cents, in line with EPS decline, assuming maintenance of the customary 50% payout ratio. Our 2020 EPS and DPS forecasts are unchanged at AUD 0.29 and AUD 0.145 respectively. Our fair value estimate equates to an unchanged fiscal 2023 EV/EBITDA of 6.6 and unfranked dividend yield of 4.0%, both discounted at WACC. Broadly speaking our fair value estimate breaks-down to 70% from explosives and 30% from fertilisers. We factor 1.8% group revenue CAGR to AUD 4.2 billion by fiscal 2023, supporting five-year annual EBITDA CAGR of 5% to AUD 1.1 billion. IncitecPivot’s is a margin story, assuming recovery in ammonium nitrate prices to longer-term historical norms following a period of uncharacteristically low pricing, in line with deferment by mining companies of capital expenditure. We think this deferment unsustainable.

IncitecPivot shares have fallen 30% from November 2018 AUD 4.24 highs, including 2.5% down on the latest announcement. At AUD 3.08 they trade close to fair value. We project dividends to grow at an 8.7% CAGR for the next five years, assuming maintenance of 50% payout ratio. But this would still be only to moderate real 3.3% fiscal 2023 yield at the current AUD 3.08 share price, discounted at WACC.

If IncitecPivot can get its operations back in order it stands in otherwise good stead. The company has proven reliably operating cash flow positive, including free cash flow positive results for the past four years. We don’t expect even this fiscal year’s hiccups to blemish the positive operating cash flow record. Net debt to EBITDA is modest at just 2.1, or 2.5 including operating leases, and forecast to decline to sub-1.0 levels by fiscal 2023 all else being equal.