What: Fertiliser and explosives business Incitec Pivot Limited (ASX: IPL) today reported a net profit gain of 21% over the prior financial year when excluding impairment and restructure costs relating to some poor overseas investments.
Including the impairments associated with the poorly performing operations profit dropped 33% on the prior year, although the share price has steadily trended up over the period.
Management's decision to present the results excluding $109 million of impairment charges is interesting given it's responsible for making the strategic decisions resulting in the huge write-downs. Notably, the company wrote off a gross loss of $61.4 million in the year related to a Turkish explosives business it recently acquired. Further impairments of $26 million were totalled relating to an investment in Fabchem China Limited.
So what: Total revenues were $3.35 billion, with approximately two thirds of the group's revenues coming from its explosives business, while the other one third came from the fertiliser business.
Both business segments benefited from the lower Australian dollar, but weaker global fertiliser prices and lower demand from the northern region of Australia saw fertiliser revenues slip. However, explosives revenue was up 5% thanks to sales growth at its Moranbah plant which mainly produces ammonium nitrate.
Total earnings before income tax were up 13% on the prior year to $519 million, but net debt increased by 16% to nearly $1.5 billion as the group continued to invest heavily in the construction of an ammonia plant in Louisiana, USA. This plant is the group's major growth project and is expected to drive significant earnings growth for the explosives section of the business on completion in 2016. Borrowings to fund the project are priced in U.S. dollars and therefore sensitive to any increase in U.S. interest rates.
What of the outlook:
The explosives business is expected to deliver flat earnings in the year ahead given the outlook for relatively subdued mining activity.
The other big factor influencing the group's earnings is its sensitivity to the volatility of major global fertiliser prices, which can shift dramatically depending on a demand curve driven by weather conditions and the price of agricultural commodities produced using the fertilisers.
The group trades on 13.7x analysts' estimates for earnings per share for the year ahead, which is about fair value given an uncertain outlook for both its core businesses. Incitec Pivot may prove a surprisingly good investment over the next few years, but it's definitely not The Motley Fool's favourite pick for out-sized returns in 2015.
