Orica Limited (ORI)

By Jason Fittler

Orica is a provider of chemicals, explosives and ground support services.

Manufacturing and distribution assets are located around the world for customers in 100 countries.

As a provider of commercial explosives Orica has a global market share of 28%, making it the largest provider of mining explosives in the world.

Within Australia, Orica and competitor Incitec Pivot (IPL) enjoy an explosives market duopoly.

Orica also supplies general chemicals for use in agriculture, construction, foods & beverages, pharmaceuticals and plastics.

Mining uses the great majority of chemicals. Orica’s ground support division ‘Minova’ provides products and services for stabilization and ventilation underground.

Miners in the extraction of many different resources use explosives, chemicals and ground supports. Coal miners (30%) and gold miners (16%) comprise the largest users of Orica’s products and services. However, demand is not dependent on any one commodity or location. Importantly, earnings are leveraged to mining volume, not price.

Orica’s earnings growth has averaged 1.7% p.a. over the previous 4 years. 2012 earnings have ORI trading at a P/E of 13.14. Analysts expect earnings to rise 6.18% in 2013, giving a forward P/E of 12.37.

Winning new contracts is the primary growth driver; previously Orica’s reputation has allowed it to win 57% of new contracts, previously held by competitors. The ongoing construction of its own chemical plants should allow it to increase margins. Conversely increased competition has the ability to erode margins.

Negative implications at an investor conference in February saw some brokers downgrade ORI; the share price has declined over 15% since.

ORI flagged ongoing weakness in the ‘Minova’ division and warned that wet weather had affected explosives volumes in NSW. The downgrade for explosives volumes is weather related and should revert to the mean, while the restructuring of the ‘Minova’ division is due for completion in FY13, which should provide upside.

Debt to equity is 71%, considered high, but interest coverage is comfortable at 8% of FY12 EBIT.

The stock shows a 4.08% dividend yield on consensus FY13 forecasts (4.87% gross yield, with 50% franking). The consensus price target of $27.50 represents a 17.57% upside to the last share price.

Orica is a suitable growth investment for risk tolerant investors.

For more information on Orica Limited (ORI) please contact us on 07 4771 4577.