Incitec Pivot had a large downgrade this morning (Credit: Kalkine Media)

Incitec Pivot’s (ASX:IPL) share price is off 14% this morning, as investors shared their disappointment about the company’s revised FY19 earnings guidance. The company previously issued a downgrade on the back of commodity price changes and unfavourable foreign exchange movements, which resulted in EBIT forecasts being downgraded from $370-415m to $321-366m. While the market could forgive this downgrade since it was down to temporary factors outside the control of management, they have recently downgraded forecasts again and are now projecting that the business will deliver EBIT in the range of $285-295m. Since management teams would almost invariably prefer to blame downgrades on external factors instead of a deterioration in the underlying business, which they have more control over, investors are generally suspicious when several downgrades come simultaneously.

Incitec Pivot manufactures and sells explosives, fertilisers and industrial chemicals. The main parts of the business are Incitec Pivot Fertilisers, Southern Cross International, Fertilisers Elimination, Dyno Nobel Asia Pacific and Asia Pacific Eliminations. The company is relatively innovative, being at the cutting edge of initiation systems facilities and deploying those technologies throughout Incitec Pivot’s global operations.

The company also announced that it is conducting a strategic review of the APAC fertilisers segment of its business. The company is the only producer of nitrogen fertilisers on Australia’s east coast, which gives the business a degree of monopoly pricing power. This has so far not been able to result in meaningful margin expansion, although the market is projecting margins to improve substantially after this year’s results. Nevertheless, much of this projected improvement is due to the favourable developments in the commodities space, as opposed to fundamental improvements in IPL’s underlying business. As such, management may need to deliver some more positive results or meaningful change out of the review to turn investor sentiment towards the stock.

 

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September 3, 2019