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Fundamental analysis
Incitec Pivot remains a popular bet with investors
August 07, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Incitec Pivot Limited
ASX Code: IPL
Current Share Price: $144.89 (as at close, August 6, 2008)
1 Year High/Low: $200.00/$60.50
This week Tim Lincoln profiles Incitec Pivot Limited (IPL) and illustrates the importance of paying attention to a company’s recent news and announcements when assessing a potential investment opportunity.
Incitec Pivot Limited (IPL)
Operations
Incitec Pivot Limited (IPL) is an integrated fertiliser and industrial chemical business. IPL is involved in the manufacture, distribution and sale of a comprehensive range of fertiliser products. The company supplies specialist products to chemical, mining, utility and manufacturing customers. IPL has extensive manufacturing and distribution facilities in strategic locations including Mt Isa, Townsville, Phosphate Hill, Gibson Island, Cockle Creek, Geelong and Portland.
Investment Opinion
IPL has benefitted from record fertiliser prices and is expected to continue to benefit from a soft commodity boom. The company has performed exceptionally well during the period 1 October 2007 to 30 March 2008 with annualised EPS growth of 246.19%. Demand for the company’s products is expected to remain high. Also, IPL’s recent strategic decision to build their ammonium nitrate plant in Moranbah will support future explosives and fertiliser production. The company may be an attractive investment opportunity for investors looking for a company with exposure to soft commodities and a strong growth profile.
Financials
IPL is a Lincoln Star Stock and in a Satisfactory position of Financial Health. Whilst the company has weakness on its Balance Sheet, this is offset by strength on the company's Profit and Loss and Cash Flow statements. Net operating profit before tax and significant items rose markedly to $233.3 million for the period 1 October 2007 to 31 March 2008 from $67.442 million in the previous corresponding period. Strengthening global fertiliser prices and record soft commodity prices contributed to this outstanding result. Pre abnormal EPS increased from 98.36 cents to 340.51 cents which translates to EPS growth of 246.19%. ROA also improved significantly from 10.77% to 25.58%.
Valuation
Despite recent selling down of IPL shares, the company’s share price has performed well, increasing by over 35% in the past six months and over 118% in the past year. IPL last closed at $158.31 at a PE of 24.66 times, which when compared to the sector average of 11.02 times, suggests the company is potentially overvalued at current prices. However, a PEG of just 0.10 suggests that the premium being paid by the market may be justifies when considering the current rate of EPS growth.
Outlook
The outlook for IPL is positive. Future share price performance is highly leveraged to the performance of fertiliser prices which in turn relies on the continuation of the soft commodity boom. Potential upside may also exist should the integration of Dyno Nobel Limited (DXL) be successful. The company is in an enviable position, benefiting from record production at a time of record fertiliser prices. IPL’s management is confident in their ability to outperform previous results based on the industrialisation of highly populated countries China and India. Continued strong performance will depend on the demand for food, feed, fibre and fuel. The main threat to the business is a weakening of fertiliser prices and the effect of a high Australian dollar on profit margins. Consensus analyst estimates expect a 155.93% increase in earnings for the full year FY08 to 1027.80 cents per share. This would see the company trade at a forecast PE ratio of 15.40 times and a PEG ratio of 0.10, maintaining its undervalued position. Therefore, we feel the recent weakness in share price may prove to be an opportunity.
Why are company news and announcements so important?
Twice a year, all listed companies are required by law to report their annual and interim financial results to the ASX. By analysing and interpreting these results as soon as they are made publicly available, you can identify financially healthy companies exhibiting wonderful fundamentals before the market understands the full significance of their report.
Also, by paying attention to company announcements made directly to the ASX, you can stay up-to-date with the activities and performance details of stocks between annual and interim reports.
News and announcements can often have an immediate impact on a company’s share price. Good news such as profit upgrades or strategic acquisitions can have a positive impact on share price. Bad news such as profit downgrades or the resignation of a key executive can often have a negative impact on share price.
In our example of IPL above, the company reported outstanding financial results for its March 2008 interim report. Additionally, on 28 July 2008 the company announced their plan to construct the strategically located ammonium nitrate complex in Moranbah Queensland.
This news has been received favourably by the market and sentiment on the stock remains positive. Should IPL achieve their 2008 earnings targets, the company is in an ideal position to deliver another period of strong share price appreciation to shareholders.
Tim Lincoln is Managing Director of Lincoln, Australia's premier fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Click here to register to receive Star Gazing – Lincoln's Fortnightly Stock Tip.
Important information:
Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 30 July 2008.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.
You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a managed fund, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.
More articles from this edition of CompareShares:
Property: Property scorecard - best property buys
Trading : Spoilt for choice - when there are too many stocks to buy and sell
Ask the expert – Share Trading: Top 5 pointers to being a successful trader and how to avoid stuffing up
Fundamental analysis: Incitec Pivot remains a popular bet with investors
Investing: Top 8 investments ideas you need to know about
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Mining: Atlas Iron signs JV deals with Fortescue
Loss: Tabcorp reports $164.6m loss
Commodities: Minara half year profit down by 80%
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