On the face of it the annual result for Incitec Pivot (IPL) and its 33% profit slump for the year to September 30 should have sent the shares lower with impairments and losses ruining a 15% rise in underlying earnings.
But as always it pays to see what a company’s board does to dividend policy when reporting ‘bad’ news of the type we saw from IPL yesterday.
In fact smart investors looked through the 33% drop in headline profit and focused on a solid rise in annual dividend which directors upped to 7.3c a share from 5.8c.
That’s a 25% lift in final payout and an apparent vote of confidence in the outlook for the company for the next year.
But was it?
The company’s outlook commentary for the 2015 year wasn’t encouraging, with forecasts of weaker earnings in its key explosives business and in some markets.
In fact so gloomy was the outlook, that you’d be entitled to see a fall in the share price.
Instead IPL shares jumped 5.5% or 16c to $3.08, a level they haven’t touched since early September.
IPL YTD – Incitec Pivot reports 33% fall in earnings
So the solid boost to the final payout appears to have been done to keep shareholders happy ahead of some grimmer news in coming months.
But even then the company is only paying around 50% of earnings, so it’s keeping plenty of cash back for the tougher times ahead.
The 2013-14 result in fact could have been as good as it gets for IPL shareholders for the next year.
The $109 million (after tax) in write-downs and asset impairments appear to be more house cleaning than any fundamental change in the value of the company’s assets.
IPL said the after tax profit of $247.1 million for the year ended 30 September 2014 compared with the $367.1 million the year before.
But add back this year’s one-off losses of $109 million and you get a profit of around $356 million.
Deduct the $73 million in one-off profits from 2013’s figure and you get a net result of around $293.5 million and 2014’s result is around 21% higher, and looks a lot better.
That makes it easier to understand the board’s increased confidence to pay the higher final dividend with the gloomier outlook in mind.
The sharp rise in final dividend boosted the full year’s payout 17% to 10.8c a share.
The EBITDA measure (earnings before interest, tax, depreciation and amortisation) shows a 15% rise (or $97 million) to a solid $742.7 million which further confirms the solidity of the result.
CEO James Fazzino said the fact that the company boosted its Australian dollar earnings in its three markets was “a great result in these challenging markets”.
The company’s explosives business lifted earnings before interest and tax 14% to $370.5 million, led by sales growth in its Moranbah ammonium nitrate plant in Queensland (and despite the tough times in its major client, the coal industry).
The fertilisers division lifted earnings 9% to $183.4 million.
Looking at 2015, the company was not positive, with earnings tipped to decline in explosives in Australia, Turkey and Indonesia.
And flat earnings are tipped in explosives in its Americas division, while the fertilisers business is also forecast to be similar to 2014.
Mr Fazzino said the businesses would face challenging market conditions in the resources and agricultural sectors in 2015.
The $109 million of impairments in the latest result related to write-downs at its Turkish explosives business, its investment in Fabchem China and the Donora ammonium nitrate manufacturing plant in the US, reflecting the loss of customer volumes.
Its new $850 million Louisiana ammonia project is 50% complete and on track to start production in two year’s time.
