Australia | Oct 18 2006
By Chris Shaw
The jump in the Orica (ORI) share price from below $23.00 at the start of the week to more than $24.00 per share today is a fair indication the market approves of its $870m purchase of Minova, a company supplying the underground mining and civil engineering sectors.
An equally good indication is the earnings upgrades that have followed the announcement of the acquisition, brokers lifting their forecasts despite suggesting Orica paid a full price for the company.
Macquarie has been one of the more aggressive in lifting its earnings per share estimates, increasing its forecasts in FY07 by 6% to 167c, in FY08 by 8% to 193c and in FY09 by 10% to 212c. This puts the broker near the top of the market, though it is still short of SB Citigroup, which has revised its estimates in FY07 by 5% to 173.2c and in FY08 by 7% to 206.9c.
ABN Amro and Credit Suisse are slightly less aggressive, forecasting earnings per share of 157.5c and 184.5c and 165.2c and 177.7c respectively, these representing minor increases to previous forecasts.
As well as being an earnings accretive acquisition the brokers agree the company provides other benefits, Macquarie noting it increases the potential for Orica to achieve market share gains through improved product penetration and a stronger presence in new markets such as metals and mining engineering and fast growing geographical markets like China and Russia.
Additionally, ABN Amro points out the deal removes some pressure on management to address the issue of an undergeared balance sheet, the broker noting there remains the likelihood of further acquisitions as the balance is not stretched even after this purchase.
The other positive as Macquarie notes is while the acquisition means the company has essentially swapped its Incitec Pivot (IPL) assets for Minova, the new company offers less earnings volatility while providing a better fit for Orica’s existing operations.
While Credit Suisse estimates on the guidance from management the acquisition falls short of generating the company’s target of an 18% return on net assets, Macquarie calculates the company will achieve this target by the third year following its integration, which will actually be in five year’s time as it will be held as a stand alone business for two years while the company integrates the recent Dyno Nobel purchase. The broker suggests such an approach also offers potential for synergy benefits to be larger than the $13m currently estimates from the deal, which adds to the attraction.
With earnings upgrades flowing through it is little surprise the average target price on the stock has also increased, the FN Arena database showing an average target of $26.25 today compared to the pre-acquisition level of $25.25. This compares to the median price target according to Thomson One Analytics of $25.35.
Orica shares are stronger today, at 12.30pm the stock was up 51c at $24.08.