IPL - Incitec Pivot

[skc]

Guess what I found?!...

...A transcript of the earnings call.

Ha! I was on the money, despite confusing myself in the process. The revaluation affects this period and will be unwound in subsequent periods. Showing the elimination has the benefit of providing a look through to what sort of profit is already sitting in inventory waiting to be realised. For most companies we don't see this because there aren't big intra-group sales.

I'm not sure why JP Morgan are saying they had to dig deeper to find this. It seems like management was pretty upfront.

Thanks. I got it I think. It actually suggests that the H1 numbers are quite solid.

It seems that the JPM analyst was confused between the actual elimination number (which was -$2m) vs the positive $32m elimination number shown on the EBIT waterfall.

 

[craft]

Thanks. I got it I think. It actually suggests that the H1 numbers are quite solid.

It seems that the JPM analyst was confused between the actual elimination number (which was -$2m) vs the positive $32m elimination number shown on the EBIT waterfall.

mmmmmm Maybe Not.


They had to back out 34.4m of profit created by eliminations pcp. This period it was only 2m. The difference of 32m falls straight to the EBIT line in this period. The reduced profit realisation between subsidiaries and hence reduced eliminations would be as a result of current spot markets and expectations of pricing to external customers when stock is sold. Even if prices keep falling and subsidiaries transact at breakeven the most that eliminations can fall by next period is 2m (it can go negative and subtract from reported ebit if prices go up)

Best to consider IPL pre eliminations me thinks (Just think of eliminations as a management revaluation of inventory on hand) – it’s much cleaner. On that basis last period was 250M EBIT this period is 199.3M EBIT.

 

[McLovin]

Best to consider IPL pre eliminations me thinks (Just think of eliminations as a management revaluation of inventory on hand) – it’s much cleaner. On that basis last period was 250M EBIT this period is 199.3M EBIT.

Does it actually tidy up the result? If the eliminations are just part and parcel of the business then using pre or post elimination figures should all come out in the wash over a couple of periods, right? Shouldn't we just expect reported EBIT to fall in the next period when the inventory is sold.

 

[craft]

Does it actually tidy up the result? If the eliminations are just part and parcel of the business then using pre or post elimination figures should all come out in the wash over a couple of periods, right? Shouldn't we just expect reported EBIT to fall in the next period when the inventory is sold.

It does if you accept the attempt to revalue inventory for transfer pricing is anywhere near useful.

Accepting it as a relevant revaluation its easy to see last period was an economic return of 250 Million and this period is a big decrease to 199.3M or -20% as opposed to the statutory EBIT which is only down 6%. If the economic story of transfer pricing revaluation is correct then the remaining 14% decrease is baked into next periods statutory result. Which is what I interpret Morgan Stanley was saying in the reference that kicked of this whole discussion.

Yes it will all come out in the wash over a few periods - but adding back the eliminations gives the timeliest economic picture if the transfer pricing gives an insight into the economics of inventory valuation.

 

[McLovin]

It does if you accept the attempt to revalue inventory for transfer pricing is anywhere near useful.

Accepting it as a relevant revaluation its easy to see last period was an economic return of 250 Million and this period is a big decrease to 199.3M or -20% as opposed to the statutory EBIT which is only down 6%. If the economic story of transfer pricing revaluation is correct then the remaining 14% decrease is baked into next periods statutory result. Which is what I interpret Morgan Stanley was saying in the reference that kicked of this whole discussion.

Yes it will all come out in the wash over a few periods - but adding back the eliminations gives the timeliest economic picture if the transfer pricing gives an insight into the economics of inventory valuation.

I get ya.

Actually this discussion has been enlightening for me. I always recoiled at the thought of biz combos, but they're not so bad.

 

[qldfrog]

And you can short IPL via put option if you wish to;

 

[skc]

And you can short IPL via put option if you wish to;

Or you can just short it with a broker who allows short selling. Plenty of liquidity.

However, I am no sure if this discussion has led to a conclusive trade decision or not...

 

[qldfrog]

Or you can just short it with a broker who allows short selling. Plenty of liquidity.

However, I am no sure if this discussion has led to a conclusive trade decision or not...

no consensus but I made my mind

 

[greggles]

After recovering nicely from $3.30 in late May, Incitec Pivot is now struggling to get through a barrier at $3.80. It has traded in a very tight range this week and something will have to give one way or the other soon.

 

[mullokintyre]

IPL appears to be staging a bit of a comeback. With a good amount of the ag areas having come out or about to come out of drought, the fertilzer side of the business might get a good boost. Consistent rains in spring will be vitally important. Long range forecasts look good, with a fair bit of subsoil moisture in ground.
I hold.

 

[Dona Ferentes]

with a $5B market cap, IPL is, post Covid April 2020, cheaper than it had been for 10 years. One fund manager reckons it could be a takeover target:

Incitec Pivot is a diversified chemicals company which manufactures and distributes explosives and fertilisers. It is the largest explosives company in the United States and the largest fertiliser manufacturer and distributor in Australia. The firm’s competitive advantage is the privileged locations of its plants and distribution assets near its customers and its access to low-cost inputs.

After having undertaken significant capital expenditure in recent years on improving the manufacturing performance of its plants, Incitec Pivot is now ex-capex, generating strong cashflows, and currently benefitting from very high fertiliser prices. The company will also benefit in the years ahead from the US Government’s trillion dollar planned infrastructure spending, which will lead to strong demand from Incitec Pivot’s quarry and construction customers in the US.

Incitec Pivot also has a strong balance sheet and a very appealing valuation, particularly given the high multiple the fertiliser distribution business in Australia could attract from other industry players. This could make Incitec Pivot a target for an industry competitor such as Wesfarmers, which could potentially achieve significant synergies from such an acquisition, or from private equity players which could look to break the business up and sell it in parts, thereby achieving much higher multiples than where Incitec Pivot is trading today.

But revenues have been flat, Margins slipped down to high teens, and PE >20. Is it changing as in box 2 (capex down, cashflows up, fert prices high?)

 

[mullokintyre]

with a $5B market cap, IPL is, post Covid April 2020, cheaper than it had been for 10 years. One fund manager reckons it could be a takeover target:






But revenues have been flat, Margins slipped down to high teens, and PE >20. Is it changing as in box 2 (capex down, cashflows up, fert prices high?)

Yeah, everything except the price seems to be going in the wrong direction. Revenue growth is just not there, and the big issue is the fall in free cash flow. Will make the divs a little uncertain.
Might have to exit this one, but I will at least be in profit.
Mick

 

[divs4ever]

i grabbed the parachute in January 2015 ( @ $3.30 ) as soon as i saw they were making agreements with CTP

so how are they going now ???

 

[mullokintyre]

Most of mine were picked up between 1.80 and 2.15, sitting at 2.67 today.
Not great profit, but did get some divvies as well.
And beats the hell out of taking a loss.
Mick

 

[divs4ever]

nice work ,

but i wanted a proper 'blue chip' and IPL was looking like going the other way

yes i escaped IPL with a modest profit and some divs , there were better shares on offer in January 2015

 

[sptrawler]

Incitec to close Gibson Island manufacturing plant, due to high gas prices.

https://investors.incitecpivot.com.au/static-files/4a590226-75dd-40b7-8ed5-295b45d00cc0

From the article:

 

[Ferret]

Incitec to close Gibson Island manufacturing plant, due to high gas prices.

Really bad news for the country.

I hope this gets lots of publicity and forces government hands to introduce a gas reservation policy or other means to make local gas affordable.

 

[Country Lad]

It sounds to me a clever way to put pressure on the federal government to go further with the proposed quarantining of gas for domestic consumption which seems to have gone pretty well nowhere.

 

[qldfrog]

Especially as it is a firm which has great potential to ride the green wave and suck billions of taxpayers $.
More credible than FMG to transition to green hydrogen then green amonia and fertilizers explosives.
But if they close production here, no green fertiliser made here either, and we need this if China put the pressure one day

 

[sptrawler]

Really bad news for the country.

I hope this gets lots of publicity and forces government hands to introduce a gas reservation policy or other means to make local gas affordable.

It certainly doesn't bode well for the gas fired recovery, they are talking about.