About: Incitec Pivot Limited is a manufacturer and distributor of industrial explosives, fertilisers, related products and services to the agriculture and mining industries. Incitec owns and operates manufacturing plants in Australia, USA, Canada, Turkey, Mexico, Chile and Indonesia and has joint venture operations in South Africa, Malaysia and China. Its primary geographic exposures are Australia and North America. The Asia Pacific represents around 56% of EBIT and the Americas around 44%.

Why it is in the portfolio: Incitec Pivot provides the portfolio with exposure to a global provider of explosives, chemicals and fertiliser. It is a little different to Orica in that it has fertiliser exposures and therefore has some exposure to the agricultural industry which acts as a bit of a diversifier away from the mining industry. Management have been focussed on transitioning the business through the mining downturn and focussing cost reduction programs and capital expenditure discipline. While it continues to face cyclical headwinds it has made some recent improvements in profitability, a reduction in net debt and has announced a buy-back.

Fundamentals: Incitec Pivot currently trades on around a 18x forward price-to-earnings ratio (arguably on depressed earnings) and offers a gross dividend yield of around 3-3.5% with a payout ratio of around 55%.

What could go wrong: Incitec Pivot is in a cyclical industry and will be impacted by the underlying activity of its customer base in mining and agriculture. Within the fertiliser business revenue is linked to the fluctuation of fertiliser commodities as well as subject to the impact of weather and agricultural activity. Given earnings outside of Australia, currency fluctuations may also impact earnings from time to time. Profitability is also sensitive to fluctuations in natural gas and ammonia prices.