Incitec Pivot feels drought pain and mulls fert division sale

Incitec Pivot eyes fertiliser sell-off options as drought bites


Agribusiness
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Drought may be weighing on fertiliser revenue, but Incitec Pivot says it's a good time to consider demerging

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Drought and lower than expected US ammonia output have prompted fertiliser and explosives maker, Incitec Pivot, to downgrade earnings forecasts for 2018-19.

The 100-year-old company is also considering selling its entire fertiliser business which just a decade ago morphed into an international industrial player with its purchase of the historic Dyno Nobel explosives company.

A strategic review in the next 15 months will consider demerging the fertiliser business.

Options include retaining the Fertilisers Asia Pacific division as an independent entity but fully owned by Incitec, or spinning it off for private sale, or to be listed separately on the stock market.

"Now is a logical time to initiate a strategic review, with the business well positioned to and benefit from the emergence of ag tech and to leverage its strong platform in the Australian market," said managing director, Jeanne Johns.

The fertiliser business had made good progress in advancing strategic priorities and growth opportunities this year under its new leadership of Stephan Titze.

However, Ms Johns also conceded total company earnings before interest and tax this financial year would be below it s May forecasts of between $370 million and $415m, mainly due to lower fertiliser earnings in NSW and Queensland, rising gas costs and lower ammonia production at its Waggaman plant in Louisiana.

Full year 2019 earnings were now tipped at between $285m and $295m.

The news immediately weighed on the company's share price, which slipped from $3.21 a share to about $3.05 early this week - now almost 25pc down on its near-$4/share peak late last year.

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However, board chairman, Brian Kruger, was pleased with the progress management had made in "a challenging year".

"The fertiliser review process will assist the board in making decisions which will best position IPL's portfolio to deliver long term shareholder value," he said.

Ms Johns agreed the company was now "well positioned to benefit from improvements in the commodity cycle".

Gains in 2019

Incitec Pivot Fertilisers had made good progress with a number of strategic milestones and operation issues in the past nine months, including nailing down a gas supply agreement to secure production certainty for the next few years at its Gibson Island nitrogen plant in Brisbane.

Production had also returned to normal at Phosphate Hill in north western Queensland after flooding hit the region and cut the railway line early this year.

Jeanne Johns

Jeanne Johns

Single superphosphate production in Victoria had been rationalised to one site at Geelong after the closure of the company's Portland plant in May.

She noted the company had "a long proud history and a unique market position in Australia".

Incitec Pivot's origins date back to two farmer co-operatives in Queensland and Victoria after the First World War, which eventually merged in 2003.

Its distribution network across eastern Australia provided about 2.2m tonnes of product to the domestic market in 2018.

The company is Australia's biggest fertiliser producer and the only east coast manufacturer, as well as being an importer and exporter.

Wesfarmers speculation

Market speculation has long put the future direction for the fertiliser business as potentially aligned with big West Australian producer, the Wesfarmers' owned CSBP.

Although booming fertiliser prices back in 2008 helped underwrite Incitec Pivot's bold takeover of US-based Dyno Nobel, the fertiliser market's increasingly erratic prices, and cropping season variability in the past decade have frustrated the company's earnings and forecasts.

Its share price has subsequently traded below similar businesses such as explosives and chemical rival, Orica.

Agribusiness analyst with stock broker, Morgans, Belinda Moore, said there had been much speculation about merging the fertiliser business with Wesfarmers' fertiliser activities for some years, however other international fertiliser companies would be interested if any split and sell off was decided.

"A divestment or demerger would reduce the company's business diversity, although this would be largely offset by reduced earnings volatility attributable to its exposure to the cyclical and seasonal agribusiness sector," she said.

Investment and trustee group, Perpetual, which holds about 7pc of Incitec Pivot shares, said the fertiliser business review, being conducted by investment bank UBS, had been "a long time coming" and good for the company's long-suffering shareholders.

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The story Incitec Pivot feels drought pain and mulls fert division sale first appeared on Farm Online.

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