The latest profit results from Incitec Pivot Ltd (ASX: IPL) exposes the risk of investing in the chemicals sector as all three leaders in this space have disappointed investors on the profit front this month.
Incitec is the latest bearer of bad news after it reported a drop in interim profit, which triggered a 4.5% slump in its share price to $3.58 during lunch time trade.
The stock is the second worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, and while that isn't quite as bad as the 20%-odd crash by pet services and products group Greencross Limited (ASX: GXL) on a big write-down, it's still disconcerting given the string of profit misses in the sector.
Orica Ltd (ASX: ORI) got hammered on Monday from its poorly received results even as the outlook for its explosives business was errm… supposed to go boom; while Nufarm Limited (ASX: NUF) lowered its full year profit expectations on the back of unusually dry weather impacting on sales of its seeds and crop protection chemicals.
Incitec has a foot in each camp as it sells explosives to the resurgent mining industry and fertilizers to farmers. Management reported a 3.3% drop in adjusted net profit to $147.1 million for the six months to end March, but the drop in net profit was a lot worse at 95% if you included the write-down of its Dyno Nobel Asia Pacific business.
Interim revenue actually went up 9.6% to $1.68 billion but no one was listening as investors are concerned that the stock is facing a profit downgrade by brokers.
Incitec will need to pull a bunny out of its hat if it is to make full-year earnings per share (EPS) consensus forecast of 22.75 cents. Incitec posted an EPS of 8.8 cents for the first half and that is on an adjusted basis.
Its fertilizer business was a drag as it was impacted by the same weather issue on the east coast of Australia that has struck Nufarm, while Incitec is struggling with an oversupply of ammonia nitrate (used in explosives) in Western Australia.
Demand for explosives in the US and Australia may be rising but the gains in volumes have been offset by operational downtime across a number of its plants.
The company's outlook also didn't give much for investors to look forward to. A reasonably promising forecast for explosives is nothing new and Incitec warned that a $1 per gigajoule increase in gas prices on Gibson Island will shave $14 million off its earnings.
Management is expecting gas prices to increase by around $3.50/GJ. Ouch!
I think Nufarm represents a much better opportunity for those with a medium to longer term outlook. Nufarm has omega-3 enriched canola seeds that should open a very lucrative revenue stream for the company from FY19 onwards.
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