Incitec Pivot looks at possible sale of local fertiliser business

Fertiliser and explosives maker Incitec Pivot will review its local fertiliser arm that could lead to its sale, with major shareholder Perpetual Investments saying it was a positive move for "long suffering" shareholders.

Incitec Pivot said other potential outcomes could be the demerger of the fertilisers business, which could also be retained and backed with further investment. The business (Incitec Pivot Fertilisers) is a major player in the Australian market.

Incitec chief Jeanne Johns.Credit: Eamon Gallagher

On Monday the company also slashed its full year 2019 earnings guidance, blaming the drop on severe drought which has led to less demand from farmers for fertilisers, high gas costs at its Gibson Island plant in Queensland and lower than forecast ammonia production at its Waggaman plant in America.

Incitec Pivot said full year 2019 earnings before interest and tax (EBIT) was expected to be between $285 million and $295 million, which is substantially below full year guidance issued in May of between $370 million and $415 million.

Analysts suggested the fertiliser business could be an ideal fit for the Perth-based conglomerate Wesfarmers, which owns the dominant fertiliser business in Western Australia. Wesfarmers declined to comment when contacted.

If Incitec Pivot exited the fertiliser business it would leave the company looking very different, as a manufacturer and distributor of explosives and much more comparable to industry peer Orica.

Paul Skamvougeras, head of equities at Perpetual Investments, said the company had historically traded at a discount to its listed peers because of the volatility in fertiliser earnings.

"We believe that the strategic review of the Incitec Pivot fertiliser business is a long time coming and should be a positive for long-suffering shareholders of IPL," he said.

"The non-fertiliser part of IPL has been performing well, and with potentially fertiliser gone, should help narrow the valuation gap to its closest competitor," he said.

According to the latest substantial holder notice provided by Incitec Pivot to the ASX, Perpetual holds about 110 million shares, or about 6.85 per cent of the company. Shares dropped 4.4 per cent on Monday to close at $3.07, but in early trade the stock fell as much as 14.6 per cent before recovering.

We believe that the strategic review of the Incitec Pivot Fertiliser business is a long time coming and should be a positive.

Paul Skamvougeras, Head of Equities, Perpetual Investments

Incitec Pivot chief executive Jeanne Johns said the company had a unique market position in Australian agriculture.

"Under the new leadership of Stephan Titze, the fertiliser business has made good progress in advancing a number of important strategic priorities and growth opportunities.

"Now is a logical time to initiate a strategic review, with the business well positioned to benefit from the emergence of ag tech and to leverage its strong platform in the Australian market," she said.

Incitec Pivot provides about two million tonnes of fertilisers to Australian agriculture each year.

Incitec Pivot chairman Brian Kruger said: "[The review] will assist the board in making decisions that will best position IPL's portfolio to deliver long term shareholder value."

Morgans analyst Belinda Moore said: "We note that over the years, there has been much speculation about merging Incitec Pivot's fertiliser business with Wesfarmers' fertiliser business. Other international fertiliser companies will also be interested," she said.

S&P Global Ratings said the review would be "transformative".

"In our view, a divestment or demerger would reduce the company's business diversity; however this would be largely offset by reduced earnings volatility attributable to its exposure to the cyclical and seasonal agribusiness sector."