incitec pivot - macquarie€¦ · macquarie wealth management incitec pivot 11 may 2015 2 analysis...

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AUSTRALIA

IPL AU Outperform

Price (at 08:13, 11 May 2015 GMT) A$3.78

Valuation A$ 4.35 - DCF/SoP

12-month target A$ 4.35

12-month TSR % +18.9

Volatility Index Low

GICS sector Materials

Market cap A$m 6,343

30-day avg turnover A$m 23.6

Number shares on issue m 1,678

Investment fundamentals Year end 30 Sep 2014A 2015E 2016E 2017E

Revenue m 3,370.8 3,947.0 4,378.9 4,795.5 EBIT m 519.4 612.2 750.6 873.1 Reported profit m 247.1 419.0 498.6 571.9 Adjusted profit m 356.3 419.0 498.6 571.9 Gross cashflow m 580.7 672.5 776.2 867.9 CFPS ¢ 35.5 40.6 46.8 52.4

CFPS growth % 19.7 14.4 15.5 11.8 PGCFPS x 10.7 9.3 8.1 7.2 PGCFPS rel x 1.16 0.95 0.95 0.90 EPS adj ¢ 21.8 25.3 30.1 34.5 EPS adj growth % 18.8 16.2 19.0 14.7 PER adj x 17.4 15.0 12.6 11.0 PER rel x 1.08 0.90 0.83 0.79

Total DPS ¢ 10.8 12.7 15.1 20.7 Total div yield % 2.9 3.4 4.0 5.5 Franking % 31 0 0 0 ROA % 6.6 7.4 8.7 10.0 ROE % 8.3 9.3 10.5 11.5 EV/EBITDA x 10.6 9.2 7.8 6.8

Net debt/equity % 37.9 39.3 34.2 27.7 P/BV x 1.4 1.4 1.3 1.2

IPL AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, May 2015

(all figures in AUD unless noted)

11 May 2015 Macquarie Securities (Australia) Limited

Incitec Pivot Big-ticket items on track Event

IPL 1H15 NPAT of $146m was ahead of our $138m and +27% on last year's

$116m (1H represents 35% of our FY estimate similar to 35:65 typical 1H:2H).

Impact

On the positive side, IPL delivered its strongest 1H production at SCF plant

in 8 years with 507kt over 100kt better than pcp. IPL’s 900-950kt full-year

guidance now looks conservative (we forecast 950kt) particularly given

observed 2H historical skew (46:54 1H:2H) but IPL wants to err on the

conservative side, with 1H a near-perfect production period. The extent of

profit benefit from SCF was understated by $35m of profit in stock (=$100/t),

which is eliminated on consolidation in 1H but will flow through to profit in 2H.

Louisiana looks good with US gas prices now $1.50 below the original

investment case. The plant is now 75% complete with the main pieces of

equipment now in place – focus from here is mechanical, piping and electrics.

Louisiana remains on track in terms of time (Q3 16 start-up) and budget

(US$850m). We forecast US$169m of fully ramped EBIT contribution,

US$83m NPAT and $0.38ps on PV basis. This is based on US$450/t CFR

ammonia and $5 US gas. Spot ammonia price is US$465/t and US gas

forward curve <$4.00 with every $1 change in gas price = US$26m EBIT.

It was positive that IPL retained flat US$ profit guidance for Dyno

Americas business given deterioration in coal markets in last 6 months. This

reflects net margin benefits from renegotiated contracts and an acceleration in

growth in Quarrying & Construction (Q&C) market. Dyno recorded 11%

growth in Q&C above system of 5-6% reflecting advantageous JV

relationships and exposure to outperforming states such as Texas.

The two disappointments were IPF (domestic fertiliser business) and base

Dyno Asia Pac business. The domestic fertiliser distribution market remains

highly competitive which has compressed margins – this was -$6m impact in

1H with similar likely in 2H – not great but not major in the scheme of things.

Whilst Moranbah is on path, extent of weakness in underlying Dyno AP result

was worse than expected across WA iron ore, Indonesia and Turkey.

Earnings and target price revision

We have reduced our FY15e and 16e eps by 4%, reflecting lower IPF and Dyno

Asia Pac contribution. We are above consensus largely due to lower A$ fct.

Price catalyst

12-month price target: A$4.35 based on a DCF/Sum of Parts methodology.

Catalyst: 2H winter plant, FX, urea/DAP price movements

Action and recommendation

O/P $4.35 TP (prior $4.50). Whilst IPF/Dyno Asia Pacific were disappointing,

the big-ticket items are on track re Louisiana, Moranbah and substantially

improved SCF production. Louisiana is now just over 12 months away from

start-up, which should drive up a step-up in earnings and related cash returns

to shareholders (dividend/buyback). DAP prices are relatively well supported

and our house call is for a weaker A$ to which IPL remains highly leveraged.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Incitec Pivot

11 May 2015 2

Analysis

Fig 1 IPL 1H15 key highlights… the good, not so good and interesting

The good …. The not so good…. The interesting…..

Very strong production at SCF with 507kt

+28% on pcp (396kt). Guidance for >900kt

appears conservative at bottom end (950kt

target) however this is prudent given chequered

track record in recent years.

No change in guidance commentary re 2H

vs six months ago (IPF lower distribution

margins only exception)

USA Q&C recovery gaining pace with 11%

growth in 1H increasing confidence in

sustainability of mid to highly single digit Q&C

volume lift.

The big-ticket items are on track. IPL re-

iterated guidance on each of Moranbah

(volume, EBIT), SCF production (>900kt with

950kt the target) and Louisiana.

Despite softer Ammonia prices, the lower gas

prices have seen the investment case for the

Louisiana facility improve since the project was

announced in 2013.

DAP prices have remained resilient with a

spot price of US$460-465/t FOB Tampa. This

compares with our FY15F forecast of US$450/t.

Louisiana project is now 75% complete with

ammonia plant nearing completion and

structural steel 85% in place. Focus is now on

above-ground piping.

Miss on IPF due to lower distribution

margins (function of competitive

environment) and dry start to year. IPF

margins expected to be down on a full-year

basis.

Gibson Island (GI) urea plant running at

85% utilization ahead of March 16 shut. GI

has been IPL’s most consistent plant in

recent years and lower utilization reflects

lower productivity of ammonia plant as

approaches scheduled shutdown.

Dry conditions in Northern NSW and

QLD, with weak soft commodity prices,

means that distribution volumes are

unlikely to grow relative FY14 levels.

Donora plant in USA being mothballed

due to weak demand in Appalachian coal

region. Nameplate capacity is 150kt

(plant running below this). Disciplined

approach by IPL.

At SCF, the focus has been on proving

the manufacturing performance to

achieve targeted volumes. Now the

focus is shifting to lowering cash

costs, to offset a higher gas impost. IPL

is targeting an FY16 exit cash cost run

rate of A$400/t.

Reported net debt of $2.178b however

IPL references $1.7b of net debt. IPL’s

net debt calculation includes fair value of

its hedging instruments which form part of

IPL’s program to manage IPL’s

US$ exposure. Effectively IPL has in the

money hedging re its US$ debt position

and fair value for this increased by

$470m through the period. When this is

taken into account, IPL’s net debt is

$1.7b.

Source: Company data, Macquarie Research, May 2015


11 May 2015 3

Fig 2 A solid result aided by lower interest expense

Result snapshot ($ m) 1H14a 2H14a FY14a 1H15a ch. 2H15e ch. FY15e ch

Sales 1508 1862 3352 1595 6% 2352 26% 4025 20% EBITDA 303 440 743 337 11% 528 20% 865 16% EBIT 193 326 519 216 12% 397 22% 612 18% IPF 32 71 104 19 -41% 55 -23% 74 -29% SCI 38 42 80 75 97% 92 122% 167 110% DNA 69 97 166 75 9% 113 17% 189 14% DNAP (excl Moranbah) 42 47 88 31 -25% 33 -29% 65 -27% Moranbah 49 66 115 61 80 21% 141 23% Unallocated costs -16 -18 -35 -12 -29% -12 -37% -23 -33% Net Interest expense 43 34 77 29 -32% 42 24% 71 -8% PBT 150 292 443 187 24% 355 21% 541 22% Tax 35 51 85 40 16% 82 61% 122 43% Minorities 0 1 1 0 0 1 NPAT (pre ISI's) 116 241 356 146 27% 273 13% 419 18% ISI's 0 -109 -109 0 0 0 Reported NPAT 116 132 247 146 27% 273 107% 419 70%


A solid headline result with a lower interest expense driving the beat

IPL 1H15 NPAT of $146m was ahead of our $138m and +27% on last year's $116m. The interim

dividend was 4.4cps (unfranked) vs our 4.2cps.

EBITDA of $337m was broadly in line with our $338m. EBIT of $216m was 4% below our $225m

but up 12% vs the pcp. Both Moranbah and DNA saw an improved earnings contribution, however

SCI (+$37m vs the pcp) was the standout.

Net interest of $29m compared with our $45m (reflects lower than expected net debt and

capitalised interest) and a tax rate of 21% vs our 23%.

Fig 3 1H14 to 1H15 NPAT bridge

Source: Company data, May 2015

Operating cash flow of $16.5m was below our $32m but ahead of last year’s $40m outflow. Cash

conversion was 18%. We note that the 1H is typically a softer period for cash conversion.

Fig 4 Cash flow conversion – 1H seasonally weak but 1H15 better than normal

$ m 1H12a 2H12a FY12a 1H13e 2H13e FY13e 1H14a 2H14e FY14e 1H15e 2H15e FY15e

EBITDA 291 464 755 255 395 650 303 440 743 337 528 865 Operating cash flow -127 748 621 -65 679 615 -40 575 535 17 668 678 Tax Paid 55 31 86 29 38 67 6 -8 -2 22 40 62 Net interest 12 22 34 23 48 71 30 28 58 23 42 71 Ungeared pre tax CF -60 801 741 -13 766 753 -4 596 591 62 750 812 EBITDA/cash flow conversion -20% 173% 98% -5% 194% 116% -1% 135% 80% 18% 142% 94%


115.7

36.7

13.3

14.2

6.5

10.2

12.1

0.1

5.0

13.9

5.6 0.1

146.4

100

110

120

130

140

150

160A$m


11 May 2015 4

Net debt of $1.7b was up 3% vs the pcp. We note that these net debt figures adjust for the fair

value of derivatives instruments in place to hedge against borrowings. On this basis, Net

Debt/EBITDA was 2.2x, which is below the 2.4x reported in the pcp, but above the group’s long-

term (post-Louisiana capex) target of 1.8x.

On a statutory basis (excluding the derivative adjustments) net debt was $2.2bn vs $1.8bn in the

pcp and our $2bn forecast. On this basis ND/EBITDA was 2.8x with gearing (ND/ND+E) of 33%.

In the pcp, ND/EBITDA was 2.5x and gearing was 29%.

Fig 5 Key balance sheet & financial ratios in solid shape

$ m 1H12a FY12a 1H13a FY13e 1H14a FY14a 1H15a FY15e

Net debt 1,634 1,287 1,634 1,384 1,772 1,672 2,178 1,818 Net Debt/Equity 45% 32% 41% 33% 41% 38% 49% 39% ND:ND+E 31% 24% 29% 25% 29% 28% 33% 28% Int Cover (EBITDA x) 10.6 13.6 10.3 9.5 7.1 9.7 11.6 12.2 Int Cover (EBIT x) 7.8 10.8 7.0 6.8 4.5 6.8 7.4 8.6 Net debt to EBITDA 1.9 1.7 2.3 2.1 2.5 2.3 2.8 2.1


Divisionally – SCI the standout

Fertilisers

Southern Cross International: SCI (PhosHill production in particular) was a key highlight of

the 1H15 result. EBIT of $75m was almost double the pcp and 42% ahead of our forecast.

The facility produced 507kt of ammonium phosphates during the period with the focus on

volumes after the manufacturing issues and the associated turnaround in FY14.

As illustrated in the chart below, SCI hasn’t achieved >500kt in the 1H over seven years

(1H07 the closest with 502k). Importantly, the 2H has traditionally seen higher production

rates (historically 46/54 1H/2H skew). While management noted that 1H15 reflected a near

perfect performance (which shouldn’t be extrapolated) we believe that management’s target of

900-950kt may prove conservative. We now forecast 950kt of SCF production in FY15, up

from 922kt previously.

Fig 6 A strong SCI production result and with 2H typically higher than 1H


392366 362

438

383363

396

507

455495

475494 509

425

379

443f

0

100

200

300

400

500

600

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

1H 2H

kt


11 May 2015 5

In addition to the production performance, the segment benefitted from higher DAP prices

(+$21m) and a lower AUD/USD (+$17m). This was partially offset by higher sulphur costs (-

$6m), a higher gas impost for 2mths of the period (-$8m) a higher depreciation expense

associated with spend during last year’s turnaround.

We estimate cash costs were ~$433/t, significantly improved from an estimated cash cost of

~$444/t in the pcp, driven by an improved manufacturing performance. We note that this

period included 2mths of higher gas costs ($8m impact). With a full period impact in the 2H,

cash costs are likely to step up on a full-year FY15 basis (Macq. forecast $462/t).

Management continues to target an exit run rate of $400/t by the end of FY16.

Incitec Pivot Fertilisers: While SCI was the standout, IPF was the key disappointment in

1H15. Segment EBIT of $19m was $13m below the pcp. We note that the prior corresponding

period included a $7m gain on land sales, implying an underling decline of ~$6m.

The segment was impacted by unfavourable weather, lags with respect to realising higher

import parity pricing and lower Urea prices vs the pcp. Reduced distribution margins resulted

in a $6m decline in segment earnings vs the pcp. In addition, with Gibson Island (GI) in the

final year of its production campaign, the facility is running at ~85% of capacity. GI volumes

were off 19% vs the pcp. A plant turnaround is scheduled for March 2016.

It is worth noting that management was able to bank gas at GI. As a result, an additional

impost associated with higher gas prices when the current supply agreement expires will be in

FY19 rather than FY18.

Explosives – DNA / Moranbah showing good resilience; underlying DNAP still hurting

DNA: DNA EBIT of $75m was in line with our forecasts and 9% ahead of the pcp. We note

that in USD terms, EBIT declined by 2%. Overall coal volumes declined by 8%, with growth in

the Powder River Basin offset by weakness in the East and loss of Illinois Basin tonnes. In

Contrast, higher value Q&C volumes increased by 11%, driven by strength in Texas.

We note that the result reflect a partial period impact of higher AN prices, but a full period

impact of higher ammonia input costs. Going forward, the business should benefit from a full

period impact of AN price increases. In addition, global ammonia prices have moderated more

recently.

DNAP: Dyno Asia Pacific EBIT of $93m was below our $102m forecast (base EBIT of $31m

ex Moranbah vs our $39m). Moranbah EBIT of $61m was just below our $63m expectation.

The company highlighted Turkey and Indonesia as key sources of weakness for the segment

with earnings down ~33% for the businesses. While Moranbah benefitted from long-term

contracts, the base business was also impacted by softer conditions in Australia.

Outlook generally as expected (ie unchanged) which isn’t bad in tough markets (mining in

particular)

While IPL did not provide financial guidance, outlook commentary was broadly consistent with

the update provided in November 2014.

DNAP: IPL re-affirmed its 330kt target for Moranbah, and EBIT of $140m. Excluding Moranbah,

earnings are expected to decline given challenging underlying conditions in key markets

(Australia, Indonesia and Turkey).

DNA: Explosives earnings are expected to be flat in FY15. Generally, Coal and Metals markets

are expected to be flat, with Q&C growth of ~4%. However, IPL expects a 10% decline in volumes

as a result of FY14 contract renegotiations. While the EBIT impact is expected to be positive, this

will be offset by higher ammonia feedstock costs. Global IS volumes are expected to be in line

with the pcp. Agricultural & Industrial Chemicals volumes are expected to decline as a result of a

planned turnaround at St Helens.

Fertilisers: The Phosphate Hill production milestone is for >900kt with the goal of achieving

nameplate capacity of 950kt. The full year impact of higher gas costs is $38m, which is expected

to be partially offset by the benefits of higher production rates relative to the pcp. Distribution

volumes are expected to be in line with the pcp, but with distribution margins lower that FY14.

Gibson Island is expected to produce at ~85% of capacity (consistent with 1H15).

Net borrowing costs are expected to total $70m with an expected full year ETR of 23%.


11 May 2015 6

We forecast an average DAP price of US$465/t for FY15 with implied US$455/t 2H. Spot prices

generally flow thru to IPL with a 2-month average lag. The FOB Tampa DAP price of $460-465/t is

broadly in line with our forecast. At the same time, A$ at $0.790 compares with our forecast of

$0.783.

For urea, we forecast US$300/t average for FY15 or US$274/t 2H vs current spot of US$285-305/t

(Middle East granular).

We forecast A$:US $0.783 and $0.667 average in FY15 and FY16. IPL is unhedged from 2H15

onwards.

Translation of Dyno Americas earnings is unhedged and hence benefits from a lower A$. It is

important to note that IPL has a large US$ debt position which provides a “natural hedge” to an

extent given a rise in A$ net debt as A$ falls (so net debt to EBITDA ratio maintained).

Fig 7 FY15 EBIT bridge – FX , Moranbah and stronger DAP production the key drivers

FY14e EBIT 519

Fertiliser Fertiliser distribution -22 Tough margins in flattish overall market less $13m gain on sale in pcp (SA distribution) DAP prices 14 US$465/t avge in FY15 slightly above pcp Urea prices -14 US$300/t urea avge in FY15 Stronger DAP production 18 Sales revenue benefit from higher production; 950kt vs 770kt Explosives Incremental Moranbah 26 $141m FY15e EBIT vs $115m in FY14 Underlying Dyno Asia Pacific -24 Tough end markets ex QLD coal, iron ore; Indo/Turkey pressure on services margin Underlying Dyno North America

-6 Strengthening volume growth in Q&C, net of higher margins and higher ammonia costs. St Helens 30kt turnaround and weaker urea prices

FX Import parity impact SCF/urea 81 Every 1c ch in A$=$6.2m of EBIT (91c to 78c, y-y ch) Dyno earnings translation 27 Every 1c ch in A$=$2m of EBIT (92c to 78c, y-y ch) Other -7 Includes higher gas costs for SCF net of lower corporate costs / BeX benefits Overall y-y ch 93

FY15e EBIT 612


IPL’s key EBIT sensitivities are:

+/- US$10/t DAP price = +/- A$10.3m EBIT

+/- US$10/t urea price = +/- A$4.4m EBIT (IPF)

+/- US$10/t urea price = +/- A$1.8m EBIT (DNA)

+/- 1 cent A$:US$ = +/- A$6.7m EBIT (transactional forex impact, assumes no hedging)

+/- 1 cent A$:US$ = +/- A$2.4m EBIT (translation of Dyno earnings)

Fig 8 IPL trading at a discount to its global fert peers … and a premium to ORI in 15/16 but discount in FY17 as Louisiana kicks in

PER (x) EV/EBITDA (x) EV/EBIT (x) Yr end FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17

Incitec Pivot Sep 15.0 12.6 11.0 9.1 7.9 6.9 12.9 10.5 9.0 Agrium Dec 15.1 13.0 12.3 9.2 8.0 7.7 12.4 10.6 10.1 Potash Dec 18.2 16.7 17.1 10.8 9.9 10.1 14.1 12.8 13.0 Mosaic May 13.4 12.3 10.5 7.5 6.8 5.8 10.9 9.6 8.2 CF Industries Dec 15.3 13.5 11.6 8.3 8.3 7.4 10.1 10.1 9.2 Orica Sep 12.7 11.9 11.9 7.4 7.3 7.2 10.0 9.7 9.6

Average 14.9 13.5 12.7 8.6 8.1 7.7 11.5 10.6 10.0

IPL prem/(disc) 0% -7% -13% 6% -2% -9% 12% 0% -10%

Fert average (ex Orica) 15.5 13.9 12.9 8.9 8.2 7.8 11.9 10.8 10.1

IPL prem/(disc) -3% -9% -15% 2% -4% -11% 9% -3% -11%

Source: Factset, Macquarie Research, May 2015. IPL priced as of 9 May, all other stocks priced as of 6 May

On a PE basis IPL is trading at a discount to average of global fertiliser peers on FY15-17

multiples. On an EV/EBIT and EV/EBITDA basis IPL is at a premium for FY15 but a discount in

FY16/17.


11 May 2015 7

Fig 9 IPL is trading above long-term PE Rel on FY15 earnings but reverts back to average on FY16/17 earnings

Source: Factset, Macquarie Research, May 2015

At 15x FY15e PER, IPL is trading above its historical average PER of 12.6x. This is in anticipation

of Louisiana kicking in FY16/17 when IPL’s PE reverts to long term average.

Fig 10 FY15 SoP and DCF average is $4.23 increasing to $4.50 average in FY16.

FY15 EV/EBIT valuation Division FY15e EBIT EBIT x EV Comment

Fertiliser 241 11.9 2857 Global fertiliser average Dyno Nobel 394 10.0 3940 Orica multiple based on current ORI share price Corporate costs -23 10.9 -251

Total EV 6546 Louisiana cumulative capex (FY14) 473 Book value

Net debt -1,722 FY14e average net debt

Equity value 5296 # shares 1660

Value per share $3.19

FY15 EV/EBITDA valuation

Division FY15e EBITDA EBITDA x EV Comment

Fertiliser 313 8.9 2796 Global fertiliser average Dyno Nobel 546 7.4 4052 Orica multiple based on current ORI share price Corporate costs -23 10.9 -251 Amortisation 29 8.0 234

Total EV 6830 Louisiana cumulative capex (FY14) 473

Net debt -1,722 FY14e average net debt



FY15 SoP $3.28 Adj SoP $3.65 inc PV of $0.38 value for Louisiana

DCF $4.81

Avge $4.23 SoP/DCF average

Source: Macquarie Research, May 2015

0.0

5.0

10.0

15.0

20.0

25.0

IPL fwd PER ASX 100

0.0

0.4

0.8

1.2

1.6

2.0

IPL PE rel


11 May 2015 8

Fig 11 FY16 SoP and DCF average is $4.50

FY16 EV/EBIT valuation Division FY16e EBIT EBIT x EV Comment

Fertiliser 322 10.8 3478 Global fertiliser average Dyno Nobel 458 9.7 4429 Orica multiple based on current ORI share price Corporate costs -30 10.2 -307


Net debt (avge of 1H15 and 2H15) -1,998 FY15e average net debt



FY16 EV/EBITDA valuation Division FY16e EBITDA EBITDA x EV Comment

Fertiliser 375 8.2 3090 Global fertiliser average Dyno Nobel 625 7.3 4574 Orica multiple based on current ORI share price Corporate costs -30 10.2 -307 Amortisation 29 8.0 234


Net debt (avge of 1H15 an 2H15) -1,998 FY15e average net debt



FY16 SoP $3.82 Adj SoP $4.19 inc PV of $0.38 value for Louisiana

DCF $4.81

Avge $4.50



11 May 2015 9

IPL 2012a 2013a 1H14a 2H14a 2014a 1H15a 2H15e 2015e 2016e 2017e

Sales Revenue 3,501 3,404 1,508 1,862 3,352 1,595 2,352 4,025 4,440 4,857 Growth -1% -3% 6% -13% -2% 6% 26% 20% 10% 9% Other Revenue 40 59 22 19 41 23 18 41 41 41 Total Revenue 3,541 3,463 1,531 1,881 3,393 1,618 2,370 4,066 4,481 4,898 EBITDA 755 650 303 440 743 337 528 865 999 1,140 Margin 22% 19% 20% 24% 22% 21% 22% 21% 22% 23% - Depreciation 156 158 110 85 194 122 102 224 219 237 - Amortisation 0 26 0 29 29 0 29 29 29 29 EBIT 599 466 193 326 519 216 397 612 751 873 Margin 17% 14% 13% 18% 15% 14% 17% 15% 17% 18% - Net Interest Exp 56 68 43 34 77 29 42 71 94 110 Pre-tax Profit 544 398 150 292 443 187 355 541 657 763 - Tax Expense 142 99 35 51 85 40 82 122 158 191 Tax Rate (Ord) 26.0% 24.9% 23% 17% 19.2% 21% 23% 22% 24% 25% Net Profit 402 299 116 242 357 147 273 419 499 572 + Net Abnormals 106 74 0 -109 -109 0 0 0 0 0 + Net Extraordiaries 0 0 0 0 0 0 0 0 0 0 - Minority Interests -3 1 0 1 1 0 0 1 1 1 Reported Profit 511 372 116 132 247 146 273 419 499 572 Profit Before Abnormals 405 298 116 241 356 146 273 419 499 572 Adj Profit (pre-abnormals) 405 298 116 241 356 146 273 419 499 572 Gross Cashflow 722 587 254 303 557 286 445 731 759 852 EPS (adj) 24.8 18.3 7.1 14.7 21.8 8.8 16.5 25.2 30.1 34.5 EPS Growth -24% -26% 4% 28% 19% 24% 12% 16% 19% 15% CFPS 44 36 15 19 34 17 27 44 46 51 DPS 12.4 9.2 3.5 7.3 10.8 4.4 8.3 12.7 15.1 20.7 Franking 68% 75% 75% 10% 31% 0% 0% 0% 0% 0% EFPOWA 1,629 1,629 1,638 1,638 1,638 1,667 1,652 1,660 1,657 1,657

EBIT (A$m) 599 466 193 326 519 215 397 612 751 873 IPF 92 96 32 71 103.7 19 55 74 88 96 SCI 175 70 38 42 79.6 75 92 167 234 174 Fertiliser elimination 3 3 -20 21 0.1 -35 35 0 0 0 Dyno Nobel 384 273 111 145 255.5 107 146 253 315 487 Moranbah 16 55 49 66 115.0 61 80 141 143 146 Unallocated costs -72 -31 -16 -18 -34.5 -12 -12 -23 -30 -30 IPF margin 8.0% 8.8% 7.8% 13.2% 10.9% 4.4% 10.2% 7.6% 9.3% 10.2% SCI margin 24.0% 12.5% 14.8% 14.6% 14.7% 21.8% 18.8% 20.0% 26.2% 20.2% Dyno EBIT margin 22.6% 16.7% 13.2% 16.2% 14.8% 11.9% 11.9% 11.9% 12.6% 16.5% Moranbah EBIT margin 42.7% 31.5% 31.0% 46.7% 46.4% 46.2% Group EBIT margin 17.1% 13.7% 12.8% 17.5% 15.5% 13.5% 16.9% 15.2% 16.9% 18.0% Cashflow Analysis EBITDA 755 650 303 440 743 337 528 865 999 1,140 ch. In Working Capital 96 138 -259 204 -56 -273 272 -1 11 -31 Net Interest Paid -34 -71 -30 -28 -58 -23 -42 -71 -94 -110 Tax Paid -86 -67 -6 8 2 -22 -40 -62 -145 -177 Other -110 -35 -48 -48 -96 -2 -50 -52 0 0 Total Operating Cashflow 621 615 -40 575 535 17 668 678 771 822 Capex -627 -452 -306 -357 -662 -210 -235 -445 -409 -296 PPE Sale Proceeds 10 24 14 10 24 5 0 5 0 0 Investments Movement -35 0 0 0 0 0 0 0 0 0 Other 50 39 1 -1 0 -12 0 -12 0 0 Total Investing Cashflow -601 -389 -290 -347 -638 -217 -235 -452 -409 -296 Proceeds from Equity Issues 0 0 0 0 0 0 0 0 0 0 Borrowings Movement -58 84 190 -208 -19 273 -273 0 0 0 Dividends Paid -187 -204 -63 -22 -85 -62 -73 -135 -239 -299 Other 0 0 0 0 0 0 0 0 0 0 Total Financing Cashflow -246 -119 127 -230 -104 212 -347 -135 -239 -299 Adjustments 0 11 0 6 6 10 0 10 0 0 Net Cash Movement -226 117 -204 4 -200 21 86 101 123 226 Balance Sheet Cash 154 271 69 71 71 92 92 92 92 92 Other CA 866 905 948 763 763 930 972 972 970 1,078 Fixed Assets 2,739 3,034 3,235 3,511 3,511 3,756 3,889 3,889 4,079 4,139 Intangibles 2,845 2,961 2,949 2,992 2,992 3,194 3,165 3,165 3,107 3,048 Other NCA 409 514 447 633 633 468 468 468 468 468 Total Assets 7,013 7,684 7,648 7,970 7,970 8,439 8,585 8,585 8,715 8,824 S/T Debt 126 34 35 34 34 670 670 670 670 670 L/T Debt 1,315 1,621 1,806 1,709 1,709 1,599 1,240 1,240 1,088 833 Other Liabilities 1,541 1,810 1,522 1,820 1,820 1,679 2,049 2,049 2,084 2,220 Net Assets 4,031 4,220 4,286 4,407 4,407 4,491 4,626 4,626 4,874 5,101 S/H Funds 4,029 4,217 4,284 4,404 4,404 4,489 4,623 4,623 4,870 5,097 Total Equity 4,029 4,217 4,284 4,404 4,404 4,489 4,623 4,623 4,870 5,097 Net Debt/Equity 32% 33% 41% 38% 38% 49% 39% 39% 34% 28% ND:ND+E 24% 25% 29% 28% 28% 33% 28% 28% 25% 22% Int Cover (EBITDA x) 13.6 9.5 7.1 12.9 9.7 11.6 12.6 12.2 10.6 10.4 Int Cover (EBIT x) 10.8 6.8 4.5 9.6 6.8 7.4 9.4 8.6 8.0 7.9 Net debt 1287 1384 1772 1672 1672 2178 1818 1818 1666 1411 Net debt to EBITDA 1.7 2.1 2.5 2.3 2.3 2.8 2.1 2.1 1.7 1.2 RoE (%) 10% 7% 5% 11% 8% 7% 12% 9% 10% 11% RoA (%) 9% 6% 5% 8% 7% 5% 9% 7% 9% 10% NTA/share 0.73 0.77 0.82 0.86 0.86 0.78 0.88 0.88 1.07 1.24 Key assumptions A$:US$ $1.028 $1.003 $0.907 $0.933 $0.920 $0.838 $0.727 $0.783 $0.677 $0.732 DAP price (US$/t) $563 $482 $434 $465 $450 $474 $455 $465 $450 $450 Urea price (US$/t) $457 $370 $332 $325 $323 $330 $274 $300 $271 $284



11 May 2015 10

Macquarie Quant View

The quant model currently holds a marginally positive view on Incitec Pivot.

The strongest style exposure is Price Momentum, indicating this stock has

had strong medium to long term returns which often persist into the future.

The weakest style exposure is Profitability, indicating this stock is not

efficiently converting its investments to earnings as proxied by ratios such

as ROE, ROA etc.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Materials)

348/1092 Global rank in

Materials

% of BUY recommendations 33% (4/12)

Number of Price Target downgrades 0

Number of Price Target upgrades 4

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-1.0

0.1

0.2

0.2

0.4

0.4

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

BlueScope Steel

James Hardie Industries

Orica

Iluka Resources

Incitec Pivot

Boral

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

BlueScope Steel


Orica

Iluka Resources

Incitec Pivot

Boral

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.8

0.3

-0.3

0.7

1.4

-0.4

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

BlueScope Steel


Orica

Iluka Resources

Incitec Pivot

Boral

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

BlueScope Steel


Orica

Iluka Resources

Incitec Pivot

Boral

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-29%

-26%

-25%

-25%

20%

22%

24%

26%

-30% -20% -10% 0% 10% 20% 30%

⇐ Negatives Positives ⇒

Net Income Margin FY0

FCF Yield FY0

Dividend Cover

Piotroski Score

Price to Sales FY0

Price to Book FY1

Price to Cash FY1

Price to Sales LTM

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

0.82-0.04

-1.09 0.07

-0.12 0.33

0.13-0.41-0.06

-0.15 0.42

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/1092)

0 50 100

Percentile relative

to market(/417)


11 May 2015 11

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2015

AU/NZ Asia RSA USA CA EUR

Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)

Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)

Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)

IPL AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, May 2015

12-month target price methodology

IPL AU: A$4.35 based on a DCF/Sum of Parts methodology

Company-specific disclosures: IPL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Incitec Pivot Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 17-Mar-2015 IPL AU Outperform A$4.50 20-Jan-2015 IPL AU Outperform A$3.50 16-Dec-2014 IPL AU Outperform A$3.40 11-Nov-2014 IPL AU Outperform A$3.25 12-May-2014 IPL AU Outperform A$3.15 23-Jan-2014 IPL AU Outperform A$3.25 12-Nov-2013 IPL AU Neutral A$2.87 16-Oct-2013 IPL AU Neutral A$2.83 12-Sep-2013 IPL AU Outperform A$2.94 04-Sep-2013 IPL AU Outperform A$2.92 23-Jul-2013 IPL AU Outperform A$3.08 13-May-2013 IPL AU Outperform A$3.24 04-Apr-2013 IPL AU Outperform A$3.35 30-Jan-2013 IPL AU Outperform A$3.46 18-Dec-2012 IPL AU Outperform A$3.38 13-Nov-2012 IPL AU Outperform A$3.33 06-Nov-2012 IPL AU Outperform A$3.34 13-Sep-2012 IPL AU Outperform A$3.40 14-May-2012 IPL AU Outperform A$3.45

Target price risk disclosures: IPL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,


11 May 2015 12

foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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