Orica’s Transformation Proceeding Apace

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Following Orica’s recent business update and investor day, analysts remain upbeat noting scope for additional capital management.

Orica’s positive business update and investor day underpin market optimism
-Management points to higher-than-planned first half earnings
-Switch of emphasis to Digital Solutions and Specialty Mining Chemicals
-Buyback announced, scope for more capital management

By Mark Woodruff

Shares in commercial explosives and blasting systems services provider Orica ((ORI)) had been largely neglected by investors prior to the March 7 business update, with the removal from the MSCI Australia Index (now complete), declining thermal coal prices and global growth concerns all weighing on the share price.

Post the positive market update, Morgan Stanley has named the company as its top pick within ASX Industrials companies.

Before March 7, Macquarie had already noted a strong start to 2025, thanks to favourable pricing for ammonium nitrate, a solid margin mix, and increased uptake of the company’s high-tech blasting solutions. Macquarie was convinced; the outlook for Orica seemed positive.

The business update thus provided confirmation of Orica’s strong start to the year, with management guiding for first-half earnings (EBIT) to be “higher than planned, with contributions from all three segments expected to be higher than the prior corresponding period.”

The main Blasting Solutions division is firing, Macquarie notes, with ongoing benefits from margin/mix, particularly in the Australia Pacific & Asia (APA) reporting segment.

Citi agrees this business remains strong and the planned Kooragang turnaround is on budget and on schedule. Also, sales of carbon credits will be finalised this month with an estimated benefit of up to $15m for the first half.

While offering profit improvements supported by the uptake of high value blasting technologies such as WebGen, 4D and Fortis Protect, notes Goldman, Blasting Solutions is not the main game going forward.

Management aims to derive half of group earnings from the emerging higher margin segments of Digital Solutions and Specialty Mining Chemicals, with its “Beyond Blasting” aspirational target suggesting Blasting Solutions will make up the other half.

Founded in 1874 as a supplier of explosives during the Victorian gold rush, Orica has grown to become a leader in the production and supply of sodium cyanide for gold extraction and ground support services in mining and tunnelling.

The company is also a major producer and supplier of ammonium nitrate, a key component in ammonium nitrate fuel oil, which is widely used in the mining and construction industries for blasting operations.

Key earnings drivers are ammonium nitrate volumes and prices, natural gas costs (input cost) and manufacturing reliability.

Additionally, Orica provides digital solutions and geotechnical monitoring technologies to enhance safety and productivity in mining operations.

Investor day

While the recent Investor Day covered the Blasting Solutions and Specialty Mining Chemicals segments, management undertook a deep dive into the Digital Solutions division.

Management also provided more colour on comments made during the business update regarding the first half tracking ahead of plan, noting “First half EBIT expected to be higher than planned, with all three segments expected to be higher than pcp”.

Underpinning confidence in the growth trajectory, suggests Citi, the company also announced a buyback, the most appropriate form of capital management in the broker’s view, given Orica is not expected to generate franking credits until at least FY27.

Orica management also announced a new capital management framework including moving to a leverage target from gearing previously.

The on-market buyback of up to $400m (circa 5% market cap) is to be completed over a year, and with a pre-tax cost of debt between 5-7%, Ord Minnett believes EPS may be boosted by between 1-2%.

Goldman Sachs sees scope for ongoing capital management given an ongoing focus on cash generation and potential proceeds from future surplus land sales.

Based on management’s aspirational mid-term percentage growth targets for Digital Solutions and Specialty Mining Chemicals of low-double-digits and mid-single-digits, respectively, RBC Capital expects around ten years will be required to meet the 50% target, assuming earnings from Blasting are unchanged.

While Orica is aiming to monetise its newly formed portfolio of industrial intellectual property and technological solutions, management has previously acknowledged this is an attempt to create and monetise a market not currently in existence, highlights RBC.

Digital Solutions explained

After reviewing the business update, Morgan Stanley assesses Digital Solutions continues to perform, with new contract wins and solid recurring revenue from geotechnical and structural monitoring hardware and software provider, Terra Insights, which was acquired during FY24.

Subcategories of Digital solutions are Blast Design & Execution, Geo-solutions, and Orebody Intelligence.

Ord Minnett feels Orebody Intelligence shows the strongest growth prospects, with opportunities to expand into the mine production stage.

The analyst explains the Blast Design and Execution category aims to charge software as a service (SAAS) fees for digital products, with low churn rates.

Elsewhere, Geo-solutions, particularly Ground Probe, is performing ahead of plan, offering predictive features and extensive monitoring capabilities, highlights the broker.

Specialty Mining Chemicals

In Specialty Mining Chemicals, Orica is concentrating on meeting the rising demand for its chemical solutions which optimise extraction processes and improve yield, explains Citi.

The business update also revealed strong sales volumes for Specialty Mining Chemicals, with Morgan Stanley highlighting that strong performance was driven by new contract wins from last year’s acquisition of Cyanco, a producer of sodium cyanide and manufacturer of other chemicals.

Record gold prices should be supportive for sodium cyanide (a key chemical used in extracting gold and silver from ore), which Orica also supplies to customers.

The Trump effect

While Morgan Stanley highlights Orica’s significant trade flows and potential exposure to President Trump’s global tariff measures, given its only North American ammonium nitrate capacity is at the Carseland plant in Canada, there are potential offsets.

As counter measures, the analysts see opportunities for product swaps and for management to secure supply within the US through existing contracts with fertiliser producers.

Outlook

Historically, Brambles ((BXB)) and Orica have traded on a similar multiple, and currently both offer 14% forecast three-year EPS growth, a similar yield, plus strong balance sheets, yet Brambles presently trades at an average 19% valuation premium to Orica, highlights Morgan Stanley.

Solid earnings growth with a relatively high level of certainty, will likely be an increasingly rare commodity in the next six-to-twelve months, suggest the analysts.

This broker’s Overweight rating is based on its view Orica is positioned to benefit from pricing growth in domestic ammonium nitrate markets and further penetration of value-added products.

Buy-rated Goldman Sachs believes the company has entered a consolidation phase, as signalled by the $400m buyback and revised financial framework after the recent acquisition spree.

UBS (Buy) believes Orica’s new capital management framework more evenly balances growth investment with shareholder returns and sees ongoing price earnings multiple re-rate potential supported by strong operating momentum and current undervaluation.

Five of the six brokers updated daily in the FNArena database have Buy (or equivalent) ratings, while Citi is on Hold.

The average target price is $21.08, up from $20.80 prior to the business update and investor day, suggesting in excess of 20.5% upside to the latest share price.

Outside of daily coverage, RBC Capital and Goldman Sachs have Buy ratings and Jarden is a Hold, with an average target of $20.42.

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