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Incitec Pivot Ltd sinks on result: Is it a buy?

Industrial and agri-chemical maker Incitec Pivot Ltd (ASX: IPL) will need to pull a bigger rabbit out of its hat following its 27% jump in half-year net profit.

Management reported a bottom line of $146.4 million this morning for the six months to end March as both its fertiliser and explosives businesses recorded earnings growth for the period.

The company has also upped its interim dividend by 26% to 4.4 cents a share as cash flow from operations turned positive to a tune of $16.5 million, compared with a negative $39.9 million for the same time last year.

Anyone following Nufarm Limited’s (ASX: NUF) interim results in March would not be surprised to see fertiliser outperform as Incitec Pivot enjoyed an 18% uplift in earnings before interest and tax (EBIT) for that division to $59 million, while EBIT for its explosives business inched up 5% to $168.1 million.

The explosives business has been hampered by the commodities and energy sell-off, which in turn is forcing miners and US-based shale oil & gas companies to cut back on the use of explosives for exploration and production.

Given the early, albeit tentative, recovery in the oil and metal prices, one shouldn’t get too pessimistic about the prospects of this business, especially if the Australian dollar remains on a back-foot against its US counterpart.

While the lack of rainfall on the east coast has negatively impacted on Incitec’s fertiliser business, the outlook for the division is positive.

But Incitec has a big second half to pull off if it is to meet market expectations and today’s result has introduced some doubt. This is probably why the stock is 1.8% in the red as it fell to $3.84 in early trade.

Interestingly, shares in Nufarm also slumped on the day it delivered its result on March 25, but as I suggested, the dip was used as a buying opportunity as Nufarm’s share price is now 10% above where it was since.

Could the same happen for Incitec?  I am not so sure.

Analysts polled on Bloomberg are forecasting a full year earnings per share (EPS) of 24.2 cents and Incitec’s first half EPS of 8.8 cents is miles away from that.

Management has not given an earnings guidance and I would prefer Nufarm over Incitec even though Nufarm has run up much more than Incitec.

Shares in Nufarm have gained 73% over the past year while Incitec is up 39%.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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