Incitec Pivot Limited (IPL)

By Jason Fittler

IPL is a long-term story but if targets achieved then in two years this will a high yielding company based on the current price and provide solid growth.

The three key drivers are:

1.  A strong earnings growth profile over the next 3yrs, driven largely by the commissioning of the Louisiana ammonia plant,

2.  Attractive relative valuation with the stock trading on a one-year forward price earnings ratio, reflecting a 20% discount to the Australian Industrials ex-financials,

3.  And a strong forward cash flow forecast of C.A$0.6bn p.a. from 2017 once Louisiana fully ramps up. This should underpin capital management initiatives and an increase in the payout ratio.

Incitec's key upside potential is dictated by the future profitability of the Louisiana project.

Our base case currently assumes the project returns 15-16% return on capital. However, current spot gas and ammonia prices imply 25% potential return from the capital investment.

Incitec's downside scenario assumes Louisiana only achieves a 10% return following a spike in US gas prices and rapid build-out of domestic US production capacity.

Australian explosives players are expected to remain largely rational in an environment where miners are targeting cost reduction as commodity prices soften.

IPL is leveraged to a recovery in US explosives demand brought on by low coal inventories and greater construction demand. With its 800ktpa, Louisiana plant expected to be operational from the financial year 2017.

With the banks looking fully valued, it is time to start looking at the sectors that provide the potential for growth in the coming years when the economy starts to recover.