Australia | May 08 2012
– Orica's interim better than expected
– Key mining services operations the main driver
– Brokers adjust forecasts and price targets
– Majority see value in the stock at current levels
By Chris Shaw
Chemical and explosives manufacturer Orica ((ORI)) reported interim earnings yesterday, delivering a net profit after tax of $253 million, down 4% on the previous corresponding period. This compares to consensus estimates of a result of around $245 million and when some post-tax shut-down impacts are excluded, underlying earnings actually increased by around 20%.
Driving the result was the key Mining Services operations, JP Morgan noting in underlying terms this division recorded EBIT (earnings before interest and tax growth) of 17.5% when plant closures and forex movements are stripped out.
The other positive in the result in JP Morgan's view was evidence of some emerging pricing growth in the ammonium nitrate market. The improvement was most pronounced in the US market, where explosives supply has become increasingly tight.
Cash flow for the period was something of a disappointment, Macquarie noting a $237 million increase in net trade working capital due to increases in both inventory and receivables meant cash flows for the half were only $39 million. An improvement is expected in the second half as Macquarie notes this is typically a stronger cash period for Orica.
Along with the earnings result, new CEO Ian Smith announced a restructuring of some of Orica's operations with the structure now based on end markets. There were no major changes in strategy announced, which Deutsche Bank viewed as a positive.
Post the interim profit announcement management at Orica confirmed full year earnings guidance, which meant changes to earnings estimates across the market have been relatively modest. As an example, Macquarie's earnings per share (EPS) forecasts have increased by just 1% in both FY12 and FY13, while Deutsche Bank lifted its numbers by 3-4% over the same period.
RBS Australia actually trimmed its FY12 estimate by 6% but made only minor changes beyond this, while JP Morgan lifted FY12 numbers but cut FY13 estimates by around 2% in both cases. Consensus EPS forecasts for Orica according to the FNArena database stand at 185.7c for FY12 and 217.5c for FY13.
Changes to forecasts mean adjustment to price targets across the market, the consensus price target for Orica now standing at $29.69, up from $28.86 prior to the result. Targets range from BA Merrill Lynch at $27.00 to JP Morgan at $32.75.
Ratings for Orica have not seen any changes, the database showing the stock scores five Buy ratings and three Hold recommendations. For JP Morgan a Hold rating is appropriate as while valuation is supportive and the medium-term growth outlook is improving, new capacity additions are likely to result in oversupply in Australia and increased capex guidance adds to earnings growth risks.
As well, while the Minova business is showing some signs of stabilising, JP Morgan continues to see downside earnings risk given low barriers to entry and the likelihood competitors use price to win market share.
RBS similarly rates Orica as a Hold, as while long-term the business is attractive given solid growth potential there is some heightened risk as Orica attempts to deliver on new projects in the shorter-term. As well, RBS suggests there is not enough upside relative to its $28.53 valuation to justify a Buy rating.
In contrast, both Macquarie and Credit Suisse have reiterated Buy ratings on Orica, the former reflecting the fact the stock offers a low-risk way to play the positive mining services theme while also offering some internal growth options. For Credit Suisse the expectation is further positive earnings momentum in FY13, which should continue to support the share price.
Shares in Orica today are down slightly in a stronger market and as at 11.05am the stock was 4c lower at $26.36. The trading range for Orica over the past year has been $21.34 to 28.72, the current share price implying upside of around 12% relative to the consensus price target in the FNArena database.
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