Incitec Pivot Ltd (ASX: IPL) released its full-year 2016 results to the market today.
Unfortunately, the year was characterised by write-offs and sharply lower profits for this $5 billion business. Here's what you need to know:
- Revenue fell 8% to $3,353 million
- Net Profit After Tax ("NPAT") excluding significant items fell 26% to $295 million
- NPAT including significant items was down 68% to $128 million
- Net debt increased $104 million to $1,400 million, or 2.1x Earnings Before Interest, Tax, Depreciation and Amortisation
- Total dividends of 8.7 cents per share, or around 3%
So What?
An exceptionally tough year for Incitec, with a plunge in global fertiliser prices absolutely hammering profits, despite ongoing excellence and record production at its production facilities in Moranbah and Phosphate Hill. Debt also widened, although earnings cover interest repayments around 8x over to offer a margin of safety.
Incitec shareholders also wore the brunt of another $200 million in write-downs and restructuring following a further $100 million write down last year. The outlook additionally remains grim for both explosives and fertiliser, with cyclical oversupply of fertiliser in the Americas as well as 'structural changes' to the U.S. coal market expected to continue into 2017.
Fellow industrial chemical and explosives manufacturer Orica Ltd (ASX: ORI) also had a tough year, with underlying profit (excluding one-offs) down 8% compared to the prior year.
Now What?
There were a number of positive developments for Incitec, with the company taking advantage of low commodity prices to sign a new gas contract that will lower costs from 2017 out to 2028. Additionally, management expects to achieve $80 million in sustainable operating efficiencies, plus a $20 million reduction in capital expenditure. The successful completion of the Louisiana ammonia plant on time and below budget should also begin contributing in 2017.
A potential recovery of fertiliser prices – which cost the company $180 million in Earnings Before Interest and Tax (EBIT) in 2016 – could easily contribute to a better year for Incitec in 2017. Yet at $3 per share, Incitec is valued at approximately 40 times its 2016 earnings – meaning a recovery in fertiliser prices would simply normalise the company's pricing, not necessarily boost shares.
Unless shares fall substantially after this result, I don't see a lot of value in Incitec at today's prices.
