Orica Well Positioned To Capitalise

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While the outlook remains positive for Orica’s traditional explosives business, analysts believe building its digital and specialty chemicals segments will further boost upside, along with capital management potential.

-Orica posts solid FY24 result
-Outlook positive for FY25
-Recent acquisitions will provide full-year contributions
-Capital management potential helps underscore positive broker views

By Greg Peel

Following recent acquisitions, Orica ((ORI)) is now not only the world’s largest explosives company, notes Morgans, it is the global leader in geotechnical and structural monitoring in mining and civil infrastructure and the world’s largest producer of sodium cyanide.

During FY24, Orica acquired Terra Insights, a geotechnical and structural monitoring hardware and software provider, and Cyanco, a producer of sodium cyanide (a key chemical used in extracting gold and silver from ore), and manufacturer of other chemicals.

At Orica’s FY24 result release (year-end September), management noted the company is now past its M&A cycle and substantially through a period of elevated sustenance spending. FY25 will be a year of bedding down acquisitions. Orica’s outlook for FY25 remains positive, with management emphasising growth in all its segments: Blasting Solutions, Digital Solutions and Specialty Mining Chemicals.

FY24 Result

Orica’s FY24 earnings were in line with or slightly better than analysts’ forecasts, despite revenues coming in -7% below consensus. An increased margin provided the offset. Earnings grew 15% year on year despite “the largest plant turnaround schedule in history”, Goldman Sachs points out.

A plant turnaround is a highly expensive planned period of regeneration in a plant or refinery. During this time, an entire part of the operation is off-lined while plants are inspected and revamped.

Asia-Pacific delivered a strong result ahead of consensus, supported by Latin America and Europe/Middle East/Africa, but dragged down by a North American result well short of consensus. North America was impacted by plant turnarounds, adverse weather, US election uncertainty and lower input costs, which Orica passes onto customers on a quarterly basis, Morgans notes, reflecting the rise and fall nature of its contracts.

Reflecting solid commercial discipline, the uptake of its premium products and its higher margin business units (Digital Solutions and Specialty Mining Chemicals), Orica’s earnings (EBIT) margin rose to 10.5%, and 11.3% in the second half, up from 8.8% in FY23. Earnings per tonne rose to $181.10 versus $158.10 in FY23.

Overall, Morgans saw a strong result, with earnings up 15.4% year on year. The second half was particularly strong (20% growth) given it benefited from aforementioned acquisitions.

FY25 Outlook

Orica is targeting further earnings growth in FY25 and will benefit from a full-year contribution from recent acquisitions, a new re-contracting cycle and reduced turnaround activity. The company aims to leverage its differentiated technologies, such as wireless blasting systems, and target growth in key sectors to grow earnings.

In Specialty Mining Chemicals, Orica is concentrating on meeting the rising demand for its chemical solutions that optimise extraction processes and improve yield, Citi notes. Management plans to increase production capacity and enhance product offerings to serve the growing needs of the mining industry.

Orica’s Digital Solutions is central to the growth strategy, with plans to expand its suite of digital products and services to help clients achieve greater efficiency and cost savings.

In regard to management’s “Beyond Blasting” strategy, the aspirational target over time is for half of earnings coming from Blasting Solutions and the other half from the higher margin segments of Digital Solutions and Specialty Mining Chemicals.

The one element of FY25 guidance that did cause some concern was higher than forecast D&A and, to a lesser extent, net interest cost. However, management spoke to a larger than anticipated benefit from ongoing mix and margin benefits, noting that in Blasting Services, mix and margin benefits in FY25 should exceed guidance, even after allowing for higher D&A.

While higher D&A is a negative, it reflects a full year of acquisitions, Macquarie notes, and investment in growth leading to related earnings benefits.

The targeted three-year average return of net assets range of 13-15% across FY25-27 is up from the prior 12-14% range and the 12.8% achieved in FY24.

Capital Management

Orica’s FY24 cash flow exceeded expectations and provided for a higher than expected final dividend, up 9% year on year and representing a payout ratio of 59%, within the company’s 40-70% range. It also took gearing down to 26%, below a 30-40% target range, and further deleveraging is expected in FY25.

To that end, Orica’s new CFO is currently reviewing the company’s capital management framework and an update will be provided at the first half FY25 result in May. This may include increasing the dividend payout ratio or introducing a share buyback. Management highlighted how Orica will generate a lot of cash in the future as its big investments have now been made.

Upgrades Follow

One issue regarding said acquisitions is that while Orica is set to benefit from a full year of contributions, Cyanco faces shutdowns to come in FY25 as it integrates with Orica’s systems and safety approach. This moderates the near-term earnings contribution, Macquarie notes, before a stronger FY26.

Post the FY24 result, Ord Minnett has cut its earnings forecast for FY25, while its estimates for FY26 and FY27 rise 2% and 4%, respectively. This leads this broker to increase its target price to $22.00 from $20.00, while raising its recommendation to Buy from Hold given the positive outlook and the potential upside on offer.

In Morgans’ view, Orica is leading the industry with its technology offering. Importantly, this area represents high-growth and high-margin work. Orica is set to deliver solid earnings growth over coming years reflecting strong demand, re-contracting benefits and solid growth from its Digital Solutions and Specialty Mining Chemicals businesses.

With a large business in the US, over time Orica should be a beneficiary of a Trump presidency, Morgans suggests. The management team continues to execute well and has demonstrated a track record of under-promising and over-delivering. With upside to a new price target of $19.72 (up from $18.85) and further capital management upside, Morgans upgrades to an Add rating from Hold.

Orica remains well positioned to capitalise on attractive industry structures and strong demand in mining end-markets, Morgan Stanley believes. This broker’s Overweight rating is based on a view that Orica is positioned to benefit from pricing growth in domestic ammonium nitrate (explosive) markets and further penetration of value-added products.

Morgan Stanley continues to see re-rating potential as this plays out and Orica delivers solid earnings growth with a relatively high level of certainty, likely an increasingly rare commodity in the next six to twelve months in the broker’s view. Morgan Stanley’s target rises to $22.50 from $21.50.

Macquarie points to a solid FY24 result and outlook with margin and mix showing tangible benefits. There is potential for a higher dividend payout and/or share buyback with further detail to come in March. Orica trades at a -10% discount to its traditional share price to earnings per share correlation, and Macquarie retains Outperform, with target increase to $20.51 from $19.76.

Of the five brokers monitored daily by FNArena covering Orica, four now have Buy or equivalent ratings. Citi remains on Neutral on valuation grounds with an unchanged target of $19.00. Citi nevertheless acknowledges Orica is trading towards the low end of its historical enterprise value to earnings ratio versus the ASX 200 Industrials.

The consensus price among the above brokers is $20.75, on range from $19.00 (Citi) to $22.50 (Morgan Stanley).

Orica’s 11% year on year increase in profit exceeded Goldman Sachs’ forecast by 2%. This broker has lowered its FY25 earnings forecast by -1%, with operational momentum largely offsetting higher than expected D&A expense. Goldman retains a Buy rating and $21.40 target.

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