Is the Incitec Pivot (ASX:IPL) share price the next shortage winner?

The AdBlue shortage has been evolving over recent weeks as supplies of the diesel fuel additive dwindle. However, a deal struck today by the federal government has brought Incitec Pivot Ltd (ASX: IPL) and its share price into the picture.

In afternoon trade, shares in the industrial chemicals and fertiliser manufacturer are uneventfully trading flat at $3.21. Though shareholders probably aren’t complaining about the 40% return (before dividends) they have made so far this year.

Now, investors might be wondering whether the company could capitalise on the current AdBlue shortage.

AdBlue brings Incitec Pivot share price into focus

The Australian government has made a move to shore up supply for the additive, critical for keeping nitrogen oxides emissions in check in diesel-fuelled trucks as Australia hits mere weeks’ worth of AdBlue. Importantly, the deal is predicated on avoiding a situation that would threaten the transport of goods across the country.

Federal energy minister Angus Taylor revealed today that the government has reached an agreement with ASX-listed Incitec Pivot.

As a result, the manufacturer will dramatically boost its production of urea. This chemical compound is critical to the production of AdBlue.

Prior to this announcement, Incitec Pivot released a public statement on 12 December regarding AdBlue supply. In this statement, Incitec stated that it supplies around 10% of the Australian market for the additive and is the only local producer to make the solution from urea melt. Meanwhile, the remaining 90% is reliant on imports.

In the minister’s statement, Taylor reaffirmed the deal won’t have an impact on fertiliser supply, saying:

The ramping up of production by Incitec Pivot will be done without impacting agricultural fertiliser supply to local farmers or disrupting local distribution chains for AdBlue.

However, the specific financial terms of the critical deal have not been shared. Ironically, a month ago, the company announced plans to close down its Gibson Island manufacturing plant at the end of 2022.

How has the core business performed?

In the last financial year, Incitec Pivot’s core businesses have been performing solidly. In FY21, revenue rose 10% to $4,348.5 million. At the same time, company earnings soared 91% to $209 million as the fertiliser market benefitted from a strengthening in commodity prices.

Based on the current Incitec Pivot share price, the company currently trades at ~29.7 times price-to-earnings (P/E). This is roughly in line with the company’s P/E multiple prior to the COVID-19 pandemic. Comparatively, the Australian chemicals industry’s average P/E ratio is around 37 times.

Finally, Incitec Pivot appears to be financially stable based on its balance sheet. An uptick in free cash flow put its cash position at $651.8 million at the end of September 2021.

The post Is the Incitec Pivot (ASX:IPL) share price the next shortage winner? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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