Incitec Pivot demerger could slip into next year following ammonia plant sale

Analysts have a mixed view on Incitec Pivot’s plans to spin out its fertiliser business following its $2.5bn sale of an ammonia facility in the US.

Incitec Pivot's ammonia manufacturing facility in Louisiana.

Analysts have a mixed view on Incitec Pivot’s plans to spin out its fertiliser business, which could slip into 2024 following the $US1.675bn ($A2.5bn) sale of the company’s troubled Waggaman (WALA) ammonia manufacturing facility in the US.

The explosives and fertiliser giant told analysts on Tuesday the deal could take up to 12 months to complete as the company works with acquirer CF Industries to secure antitrust regulatory approvals.

Incitec Pivot (IPL) has previously said it would proceed with its plan to slit into two dedicated explosives and fertiliser companies following completion of the Waggaman sale.

In a note to clients, Morgan Stanley’s Andrew Scott said the transaction would “crystallise value and simplify the organisation, increasing the importance of the higher quality explosives business”.

But he held reservations about the ongoing strength of a spun out fertiliser business.

“We believe it makes sense to pursue avenues to capitalise on favourable ammonia market dynamics, particularly for a US producer,” he said.

“Management have indicated that once the sale is concluded the focus will shift to a demerger of the IPF fertiliser business.

“While fertiliser prices are currently favourable, at long-run average prices the manufacturing assets are not attractively positioned on the cost curve.

“Our analysis continues to point to earnings and balance sheet inefficiencies. In particular, we are not convinced that the IPF business would be well placed to navigate cycle lows.

“We are not convinced that the demerger will necessarily take place.”

However CLSA’s Daniel Kang was more bullish on the prospects for a demerger.

“With ammonia prices halving since Incitec Pivot received unsolicited approaches for its Waggaman ammonia plant in late 2022, the confirmation of its sale to CF Industries will bring significant relief, in our view,” he said in a note to clients.

“Once regulatory approval for the sale to CF is granted, we expect IPL to return to its stated demerger strategy.

“As IPL proceeds with the demerger, we believe further value can be unlocked.”

Incitec Pivot announced in November that it would delay the spin out of its fertiliser division while it undertook a strategic review of the Waggaman plant.

In an announcement to the ASX late on Monday, the company said in addition to the sale of the facility it had secured a 25-year ammonia supply agreement with CF for up to 200,000 short tonnes of ammonia per annum to support its Dyno Nobel Americas (DNA) explosives business.

The value allocated to the ammonia supply agreement is approximately $US425m which will be offset from the cash proceeds of the sale agreement for Waggaman.

About 30 per cent of Waggaman’s output has traditionally gone to Incitec’s US explosives business, with the rest sold on the open market.

Morgan Stanley said the sale price was at its mid-point valuation but likely ahead of market expectations. Morgans described it as a “fair price but not a great price”.

Speaking to analysts on Tuesday, Incitec Pivot managing director Jeanne Johns said the focus was now on closing the deal “as expeditiously as possible”, while completing a $400m share buyback by the end of the fiscal year (September 2023).

“With the decision to sell this world class asset we will reduce our excess exposure to commodity and operating risks while maintaining Waggaman strategic value,” she said.

“Since our strategic review process was announced, we’ve undertaken a robust competitive sales process to seek full value delivery.

“We’ve also secured a long-term cost competitive ammonia supply for our Dyno Nobel Americas business, with a strategic buyer with an excellent operating track record that can provide us with the desired supply flexibility.

“The divestment unlocks value and supports the strategy of creating two industry leading businesses.”

Jefferies analysts suggested a larger buy-back was now on the cards while CLSA said further capital returns to shareholders were likely given the sale proceeds would wipe out all debt and push Incitec Pivot’s balance sheet into a net cash position.

Incitec Pivot management also told analysts on Tuesday that the company’s plans to produce low carbon blue ammonia at Waggaman remained on track despite the sale to CF.

The company has been progressing plans to develop a carbon capture facility at the site as early as this year.

“We have previously communicated that on our watch we were interested in executing the carbon capture and storage project and typically we don’t see that project, because it changed ownership, will be derailed,” Incitec Pivot chief financial officer Paul Victor told analysts.

“We actually see if the project gets sanctioned, we’ll continue in executing that at WALA, and obviously Dyno will have access to those low carbon ammonia volumes under the long-term supply agreement.”

Incitec Pivot shares were trading 2.7 per cent higher in afternoon trade at $3.21.