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Incitec’s share price fights back despite broker downgrades

Fight back

The Incitec Pivot Ltd (ASX: IPL) share price recovered most of its early loses as at least two brokers downgraded the stock following its full year profit results.

The fertilizer and explosives supplier crashed as much as 6.2% this morning to become the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index before steadily recovering in the afternoon to close 1.1% lower at $3.49.

In case you are wondering, the worst performers on the index on Wednesday are the Mayne Pharma Group Ltd (ASX: MXY) share price with a 6% plunge, the Orocobre Limited (ASX: ORE) share price with a 5.8% loss and Netwealth Group Ltd (ASX: NWL) share price with a 5.7% drop.

Hit by broker downgrades

Incitec got hit after Citigroup and JP Morgan downgraded the stock. Citigroup believes that the company is at risk of missing consensus forecasts even though the company should be able to deliver a sharp rebound in earnings for FY20. It’s FY19 earnings were hit by one-off items.

“Explosives demand continues to firm, but with long term contracts recently reset (negatively), pricing leverage will only likely emerge from FY22,” said Citi.

“Given ongoing drought conditions, we believe IPL will be in no rush with its strategic review of its Fertiliser business. With the recent rally in IPL shares, we believe risk-reward is now evenly balanced.”

Citi lowered its recommendation on the stock to “neutral” from “buy” with a target price of $3.55 per share.

Weather clouds outlook

JP Morgan made a similar downgrade as it lowered its rating on Incitec to “neutral” from “overweight” even as it acknowledged that the stock should trade at a premium to rival Orica Ltd (ASX: ORI).

“We downgrade IPL to Neutral as the stock has traded through our valuation and outperformed the ASX200 by 12.4% since Sept. In our view, IPL warrants a technology premium to ORI based on its targeted deployment of capital into tech,” said the broker.

“A poor ANZ weather outlook continues with the necessity for drought-breaking rain to replenish the water table. We do not expect key commodity pricing recovery into 1H20.”

While demand for explosives is expected to grow, weak fertilizer pricing, poor weather and currency exchange rates remain headwinds for the company.

JP Morgan’s price target on the stock is $3.40 a share.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of Netwealth. 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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