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Morningstar | The Big Hits Keep on Coming for IncitecPivot; Now Queensland Flooding Crimps Fiscal 2019 EBIT

Our AUD 3.00 per share fair value estimate on no-moat IncitecPivot is unchanged. That’s despite reducing our fiscal 2019 EPS forecast by another 18% to AUD 0.23 due to an extended rail outage for Phosphate Hill. We think the drivers are short-term only, and long-term assumptions remain intact. Despite this, the company must feel like a bit of a punching bag. Recent Queensland flooding has elicited a statement from Queensland Rail that it doesn’t expect the line between Phosphate Hill and Townsville to reopen until late April to mid-May 2019. This follows other recent setbacks for IncitecPivot, including unplanned plant outages at Louisiana ammonia and Phosphate Hill. While the company is taking action to reduce the further impact on Phosphate Hill production, including some transport via road, it estimates that the rail outage will cost approximately AUD 100 million-AUD 120 million in EBIT.

We assume a slightly above guidance mid-range AUD 113 million EBIT impact from the flooding and reduce our fiscal 2019 group EBIT estimate by 16% to AUD 604 million. We cut our fiscal 2019 DPS forecast by 18% to AUD 11.5 cents, in line with EPS decline, assuming maintenance of the customary 50% payout ratio. Our 2019 EPS and DPS forecasts are little changed at AUD 0.29 and AUD 0.145, respectively. Bad news tends to come in threes, and IncitecPivot has had its three; we don’t expect any further mishaps.

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 project dividends to grow at an 8% CAGR for the next five years, assuming maintenance of 50% payout ratio. But this would still be only a moderate real 3.6% fiscal 2023 yield at the current share price. At AUD 3.40 IncitecPivot shares are 20% below November 2018 AUD 4.24 highs but remain somewhat overvalued.

We factor 1.6% group revenue CAGR to AUD 4.2 billion by fiscal 2023, supporting five-year annual EBITDA CAGR of 3.8% in explosives and 7.5% in fertiliser, the latter from a low base. This 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 is unsustainable and anticipate it unwinds from now.