The IPL result is out, it is unsurprisingly strong, given the commodity pricing backdrop.
There was a sizeable working capital build (increase in inventory, increase in accounts receivable). This is normally something we would worry about, but in this instance it is readily explainable by the movements in ammonia, DAP and urea pricing.
When it unwinds, in this second half, it will be one of the strongest cashflow generating halves in IPL’s history.
Here’s where we get to the good bit.
The below shows the realised prices over the half just gone, and, as you can see, spot prices imply that earnings across the different product lines have a 30-50% tailwind behind them.
Of course, commodity prices could collapse, and those spot prices will not be realised. That’s a distinct possibility, and it is for that reason we are underweight the sector.
However, if these prices are maintained, IPL doesn’t need to do anything else, and yet could broadly double in valuation. As such, from a portfolio perspective, we are mindful that we need a good quality exposure in the sector, and IPL is it.
The decision to split the business in two is a good one.
IPL suffers from a “holding company discount” where the coal centric explosives business drags down what would likely be a much higher multiple commodities company (fertilisers, effectively).
We are unsure of the “lack of operational synergy” that management goes on to describe from maintaining common elements of production (ammonia, ammonium nitrate) between the two divisions (mainly because we have been hearing for many years about how there is synergy) but we accept that the narrative is no longer useful, and no longer one that the company itself will promote.
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