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.
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.
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.
And you can short IPL via put option if you wish to;
no consensus but I made my mindOr 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...
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.
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.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?)
Really bad news for the country.Incitec to close Gibson Island manufacturing plant, due to high gas prices.
It certainly doesn't bode well for the gas fired recovery, they are talking about.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.
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