Incitec Pivot revives plan to split explosives and fertiliser businesses
After abandoning a plan to spin out its fertiliser unit in 2020, the explosives giant says the time has now come to revive the strategy.
Incitec Pivot has revived a plan to spin out its fertiliser division, saying on Monday it will unwind its boomtime acquisition of explosives pioneer Dyno Nobel and separate its explosives and fertiliser arms into two separate listed companies.
The decision comes after Incitec declared a 10c a share dividend to shareholders, on the back of a $384m after-tax profit for the first half of the year, up from $36m at the same time in 2021.
Incitec booked earnings before interest and tax of $568m, up from $110m, compared to the first half of its previous financial year, which ends on March 31.
Group revenue rose 47 per cent to $2.55bn.
But overshadowing the financial results was the announcement by the explosives and fertiliser major that it would split itself into two businesses, reviving a plan it abandoned in April 2020 after testing the market’s appetite for a separation.
“The proposed separation of Incitec Pivot Fertilisers and Dyno Nobel is expected to be implemented via a court-approved scheme of arrangement, subject to relevant approvals. Target completion date of the proposed structural separation is early 2023, subject to required approvals and consents,” Incitec said on Monday.
Incitec’s half-year report shows its Asia Pacific fertilisers business booked EBIT of $256.9m for the period, up from $20m.
Its Dyno Nobel business booked total EBIT of $330.9m for the period.
The company’s record half-year results were boosted by the commodities boom that has buoyed output at the company’s major clients, and the revival in Australia’s farming sector.
But earnings still fell short of analyst consensus of a net profit of around $430m, pushing the company’s share price down 14c, or 3.7 per cent, to $3.60 on Monday.
But Incitec’s major news was its move to unwind the company’s $3.3bn takeover of explosives pioneer Dyno Nobel in 2008, which merged the company’s Australian fertiliser business with Dyno Nobel’s global explosives operations as the global mining boom gathered pace.
The rationale behind the takeover at the time was combining the core nitrates manufacturing business of both companies – used to produce both fertilisers and explosives – at a time a belief the commodities supercycle, based on the rising middle class in China and other parts of Asia, would benefit both businesses.
Incitec managing director Jeanne Johns told analysts on Monday the markets for both sides of Incitec had now changed, with the emphasis now on value adding through technology to very different types of clients.
Dyno Nobel’s clients were increasingly looking to the company for improved blasting technology, she said, rather than just sales of the raw explosives. And fertiliser sales to farmers were becoming dependent on value adding through liquid fertiliser offerings, and the additional of tailored micronutrients.
Ms Johns said both halves of the business now had significant opportunity for growth, particularly given the company’s strong financial performance over the last year had helped strengthen its balance sheet.
While Incitec finished March with net debt of $1.39bn, $53m more than at the same time in 2021, its debt to earnings ratio had improved substantially over the last year.
Details of the demerger won’t be released until later this year, but Ms Johns told analysts the company planned to spin out its fertiliser assets in a debt-free vehicle, positioning both companies for growth.
Incitec last considered spinning out its fertiliser division in 2019, when the savage drought on the east coast of Australia was crunching farming communities. It announced its decision to retain the business in April 2020, as uncertainty around the emerging Covid-19 pandemic battered markets and threw a shadow over global economic growth.
Ms Johns said Incitec’s decision to hold on to its fertiliser business was the right decision at the time, but said the company’s investment in the division since then had set it up well for the future.
“In the fertiliser business we’ve invested in bio-fertilisers as well as a number of precision agricultural solutions, and in our manufacturing excellence,” she said.
“With this balance sheet, we’re in a position to be able to set both businesses up for success, which means that the debt that we do have will be able to be retained by Dyno Nobel without restricting its future investment options. And we’ll be able to leave the fertiliser without any of the debt on their balance sheet, and that will allow it to thrive as a stand-alone entity.”