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Treasure Chest: Orica’s Technology Tailwind

Treasure Chest | Nov 21 2023

This story features ORICA LIMITED. For more info SHARE ANALYSIS: ORI

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on Orica.

By Mark Woodruff

Whose Idea Is It?

RBC Capital Markets

The subject:

Orica ((ORI)), the global player in the explosives industry for mining, quarry & construction markets.

More info:

RBC Capital Markets sees attractive upside from current levels for Orica shares given leverage to a tightening ammonium nitrate market, margin upside from contract renewals, on top of an evolving product mix.

Orica has a global network of manufacturing operations across Australia Pacific and Asia, North America, Latin America and Europe, along with the Middle East and Africa, and has customers in over 100 countries.

The broker believes the company’s core manufacturing capability and innovative product range deliver a meaningful barrier to entry.

Research coverage is initiated with an Outperform rating and 12-month price target of $20, implying a potential total return (inclusive of dividends) of around 30%. Orica shares are currently trading around $15.67, having traded in a range of around $14 to $17 over the last year.

The key commodity exposures for the company are the price of ammonium nitrate and the domestic price of gas.

Supply of ammonium nitrate is unlikely to grow materially in the near-term, suggest the analysts, due to the carbon intensity of production, leading to a tightening market balance. Thankfully, the company is well-placed to pass through recent heightened spot gas/ammonium nitrate pricing, suggests the broker, when contracts are renewed with customers.

Orica accounts for around 15% of NSW gas consumption and therefore has a sizable carbon emissions footprint. RBC, Points out management has an active strategy towards decarbonistation in the longer term.

This strategy has strengthened the company’s green economy credentials and social license, but also positioned it at the forefront of its peers in the mind of the market, suggests the broker. See also FNArena’s summary of the company’s recent Sustainability Investor Day Orica’s Green Ambitions Well-Received –

Orica is also continuing to evolve and monetise its portfolio of new technologies and services, explains RBC.

A technology advantage should enable management to leverage both the growing application of data in mining, along with increasing customer demand for more refined blasting techniques, suggest the analysts.

Two weeks ago, FY23 results for Orica slightly beat consensus expectations and were well received by analysts.

Compared to the previous corresponding period, earnings (EBIT) for APAC, EMEA, North America and Latin America grew by 24%, 24%, 11% and 1%, respectively. 

Goldman Sachs felt operations in North America compensated for a weak result achieved in the EMEA region, though Jarden anticipated FY24 improvement for both the EMEA and Latin American regions.

This broker explained mine closures and continuing supply interruptions from Russia-Ukraine impacted LATAM in FY23. Jarden is 19% more positive than consensus for EMEA's FY24 earnings.

A FY23 standout, according to Morgan Stanley, was 103% earnings growth for Digital Solutions.

Customers are seeking both productivity gains and sustainability outcomes, noted Ord Minnett, which is driving new technology and increased adoption of premium products. 

UBS also noted an uplift in technology adoption, which helped underpin the FY23 operating performance, along with re-contracting pricing benefits and sustained mining demand.

Despite global macro volatility, adverse weather and manufacturing down-time, operating cash flow was materially above market expectation (improving to $899m from $536m in FY22), noted UBS, driven by higher earnings and cash inflows from lower working capital.

The company’s three-year outlook for average return on net assets (RONA) was increased to 12-14% from 10.5-13%, which Jarden believed was conservative given the FY23 return was 12.6%.

Management at Orica guided to an improved FY24, despite negative impacts from major first half maintenance projects, which leads Citi to believe guidance is reflective of strong underlying demand.

Of the six brokers monitored daily by FNArena that cover Orica, four have Buy (or equivalent) ratings and two have Hold recommendations. The average target of the six is $17.73, which suggests around 14% upside to the current share price.

Buy-rated Goldman Sachs and Jarden are not part of FNArena's daily monitoring. These brokers have an average target price of $18.50.

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