Incitect Pivot is a diversified primary sector play, it gives exposure to agribusiness and resource activity, albeit with the high levels of volatility that implies. The company has some pricing power from its dominant fertiliser market share in the eastern states, but in the US explosives market it is more of a price taker. The volatility of the stock was underlined when first half net profit after tax fell 20% to $143.5m. The shutdown of the Mt Isa sulphuric acid plant and lower fertiliser prices were the main causes. Macquarie has an outperform rating, saying weakness in fertiliser is offset by positive signs in the explosives business:
This should mark the end of the earnings downgrade cycle for IPL (or close to it) with FY12 the trough year. 15% growth is expected in FY13 driven by Moranbah and non-recurrence of 1H fertiliser issues. Key catalysts are potential near term strength in DAP prices as well as successful start-up of Moranbah in July and ramp-up from there. IPL is trading at a 21-22% discount to ORI on FY12 and FY13 PE multiples.
The stock is on a dividend yield of 3% and an earnings multiple of about 13 times. Goldman has a neutral rating, showing some scepticism about the US operations:
The North American explosives businesses performed better than we expected, aided by higher sales into the fertiliser market and a turnaround in the underperforming Canadian business. While Asia Pacific explosives reported a strong improvement in earnings, after adjusting for the A$16 mn impact of floods in 1H11, earnings were essentially flat.
Citi has a buy and a price target of $3.55, which is a reduction:
Even with a soft outlook for DAP prices and US coal, we see IPL as an attractive investment offering longer-term value and growth being supported by Moranbah. We cut our FY12-14E NPAT by 1-6% and reduce our target price to $3.55 following our earnings revisions and contraction in the forward PE multiple. Despite this IPL still offers an ETR of 16% whilst also trading on a FY13E PE of 10x (a 12% discount to the FY13E industrials ex Financials PE of 11.5x).
Overall, the earnings multiple does not look cheap, but the stock offers diversification in areas that should do well long term. And at least there is a reasonable dividend yield.