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Brokers mixed on Incitec Pivot after 1H2018 result

Shares in industrial chemicals, fertilisers and explosives group Incitec Pivot Ltd (ASX: IPL) fell for the second straight day on Thursday after the company posted a 1H2018 result that was below consensus forecasts.

But is the stock worth another look right now?

That’s a question that has most market watchers voicing somewhat mixed views, given differing assessments on the stock’s risk reward balance at current levels.

And whilst Incitec Pivot may be trading on a lower trailing twelve month P/E to peers, some argue that the stock is looking expensive right now.

According to Reuters estimates, Incitec Pivot is trading on a P/E of 19.9 times, compared to Orica Ltd (ASX: ORI) on 471.9 times and Nufarm Limited (ASX: NUF) on 30.1 times.

Credit Suisse is one broker saying the stock looks pricey and downgraded Incitec Pivot to “Underperform” from “Neutral” on Thursday.

It argues that the company’s valuation is looking stretched due to factors such as uncertainty around capital expenditure and costs and headwinds for the Australian explosives business.

“With a more significant rebasing of FY18 than expected, headwinds in Australian explosives increasingly apparent, some uncertainty around capital expenditure and costs from an extended maintenance cycle and a surprisingly small reaction to an underwhelming 1H18 result seeing IPL look increasingly expensive at 18x FY18 EPS, we downgrade our target price to A$3.39/share and rating to UNDERPERFORM,” the broker said in a report.

Morgans agrees on the subject of valuation. According to its estimates, Incitec Pivot is trading on a FY2019F P/E of 16.5 times, above its long-term average P/E of 13-14 times.

The broker maintained its “Hold” recommendation, noting a balance between the reward of a share buyback resuming, a falling Australian dollar and DAP price against the risk of weak ammonia and urea prices.

Morgan Stanley is also neutral on the company, retaining an “Equal-weight” rating and says while recent share price weakness has opened a gap in its valuation, “the stock is likely to be confined to its recent trading range” pending a broader discussion on the company’s strategy.

“Management provided some colour on recent organisational changes, but we believe the market is looking for a broader discussion re: the group’s longer-term strategic setting,” it said in a report.

Ord Minnett however, remains bullish on the outlook for Incitec Pivot and says the company “is entering a period of strong operational performance and earnings growth”.

The broker says earnings from Incitec Pivot’s US ammonia plant, WALA and improved explosives demand are expected to drive growth, although volatile fertiliser pricing and currency remain headwinds.

It added that productivity benefits from the company’s Business Excellence program “have supported divisional margins in recent periods and, along with the announced share buyback, are expected to generate EPS growth, although Gibson Island remains a distraction.”

The broker also says valuation support exists and maintains its “Buy” recommendation.

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. 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 Scott Phillips.

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