Demand Remains The Key For Orica

Array
(
    [0] => Array
        (
            [0] => ((ORI))
        )

    [1] => Array
        (
            [0] => ORI
        )

)

This story features ORICA LIMITED.
For more info SHARE ANALYSIS: ORI
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Mining services and chemicals group Orica ((ORI)) has met market expectations with its interim profit result, which in the view of Deutsche Bank was as good as an upside earnings surprise as the result contained no unexpected surprises despite what has been a challenging operating environment.

The company recorded a profit of $264 million for the six months, which is a 15% increase on the previous corresponding period and was, according to JP Morgan, a high quality result particularly as group cash flows improved from previous periods.

Bank of America-Merrill Lynch also attributed the result to a positive contribution from the group’s mining services, consumer products and chemicals divisions, as well as some favourable foreign exchange movements and synergies from recent acquisitions.

Factoring in these synergies and revised expectations for ammonium nitrate prices sees the broker lift its earnings estimates modestly in coming years, such that its earnings per share (EPS) forecasts now stand at 170c this year and 180c in FY10.

Other brokers have responded similarly to the profit result with JP Morgan increasing its EPS estimates in FY10 by 2%, its EPS numbers now standing at 144c this year and 173.5c next year. Credit Suisse is more aggressive in forecasting 166.5c this year and 183.8c in FY10, the broker’s top of the market numbers supported by its expectation the group’s pricing power in explosives and strong operating results from the Chemicals division will continue to deliver from an earnings perspective.

The question remains one of demand for the group’s products and here Bank of America-Merrill Lynch is more cautious, as while volumes related to thermal coal remain resilient, the group’s other markets, including metallurgical coal, metals and quarrying, represent something of a risk to earnings in the medium-term.

RBS agrees and is the only broker in the FNArena database to rate the stock as a Sell at present, suggesting while the share price may benefit for a while longer from a rotation back into cyclical stocks, earnings are likely to continue to come under pressure given key user end markets are cyclical as well.

As well, RBS suggests the recent run in the share price means there is now not a lot of room for error with respect to the share price multiple, something the stockbroker is cautious of given the potential for ongoing demand weakness in some areas of the company’s operations.

This should become more apparent in FY10 in the broker’s view, as its EPS numbers call for results of 161.2c this year but only 154.3c in FY10. In comparison, consensus EPS estimates according to the FNArena database stand at 168.7c and 182.3c respectively.

While Deutsche Bank is more positive with respect to earnings expectations and rating given it calls the stock a Buy at present, the broker agrees demand is a concern going forward, especially in the coal and base metals markets. Despite this, the broker suggests the stock offers value at current levels, though it does caution investors the stock should be a late cycle play.

Overall the FNArena database shows Orica is rated as Buy three times, Accumulate once, Hold five times and Sell once, with an average target of $19.49. This is up from $17.93 prior to the result and reflects the increases to broker earnings forecasts.

Shares in Orica this morning are slightly stronger and as at 11.00am the stock was up 17c at $19.16. This compares to a trading range over the past year of $10.75 to $31.30.

Click to view our Glossary of Financial Terms