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Explosives remain stable

Fertiliser and explosive manufacturer Incitec Pivot (ASX: IPL) has handed down a well-received set of full-year results. With reported net profit after tax (NPAT) increasing 10% to $511 million but underlying NPAT falling 24% to $405 million, the market must be liking the outlook for 2013 and beyond.

The Dyno Nobel explosives business was once again the stand-out division, with high single-digit growth in volume and profits delivered in both the Asia Pacific and American regions. Explosives now account for 60% of group earnings before interest and tax (EBIT).

The remaining 40% of EBIT come from Incitec Pivot’s fertiliser business. This division came under significant pressures in 2012 on a multitude of fronts. Fertiliser results were affected by lower commodity prices leading to a lower volume of sales, the high Aussie dollar, significantly lower margins in the distribution business, and production outage costs at the Mt Isa sulphuric acid plant.

In spite of this mixed result, the board has declared a final dividend of 9.1 cents per share (cps). This brings the full-year dividend to 12.4 cps, an increase of 8% on the prior year and placing Incitec Pivot on a trailing yield of 4%.

Incitec Pivot’s management chose not to give any specific guidance around 2013 profits, however management did note that the ammonia nitrate plant was expected to contribute an extra $75 million in EBIT and that industry volume growth in explosives was also expected.

Explosives maker and competitor Orica Ltd (ASX: ORI), which has also just reported its full-year results, painted a similarly positive outlook for explosives demand from the mining sector in 2013. Orica also announced expectations of profit growth in 2013.

Major explosives customers such as Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) are also expecting to increase production volumes although at lower market prices. While the lower resource prices will put pressure on profit margins for Incitec Pivot and Orica, they should benefit from the greater volume of production.

Foolish takeaway

The agricultural and resources sector are both forecast to experience strong demand for the foreseeable future. Low-cost producers who can benefit from increased volume rather than being reliant on boom-level high prices are the businesses with the most sustainable and exciting prospects.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool contributor Tim McArthur doesn’t own any of the stocks mentioned.  The Motley Fool ’s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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