- ORI
- MARKET CAP
$9b
Orica
Demerger completed
ORI; Buy up to $24.55
Orica has successfully completed the demerger of its paint and related businesses – with the ASX listing of DuluxGroup commencing earlier this week (trading under the code DLX). We initiate coverage of DuluxGroup elsewhere in this week’s report.
“Orica has demerged its coatings, home improvement and garden care products businesses, further concentrating its focus on being a market leading provider of mining consumables and services.”
The demerger of DuluxGroup has resulted in existing Orica shareholders receiving one DuluxGroup share for every Orica share held, as well as retaining their Orica shares. The nominal value of the DuluxGroup shares is $2.50 and it has traded at a small premium to this figure in the first few days of listing. At the same time the Orica share price has adjusted down by around $1.50 – $2.00.
Hence, the initial response from the market has been positive – supporting the investment thesis that there was lack of synergy between the two business segments and the new structure should generate better value recognition of the Dulux business (which represented only 12% of earnings).
The distribution of shares in DuluxGroup is being achieved by way of a capital reduction for Orica (totalling approximately $216m) and a demerger dividend (the amount of which will be based on the volume weighted average price or “VWAP” of DuluxGroup shares in the first five days of trading).
Orica Update
Orica’s portfolio of businesses now comprises three platforms:
- Mining Services – a leading supplier of commercial explosives and blasting systems to the mining and construction industries globally
- Minova – a global leader in the supply of strata control systems to the underground mining and civil tunnelling markets
- Chemicals – Australasia’s leading chemical company and a global leader in the supply of sodium cyanide to the gold industry
With some 90% of its business centred on the mining consumables and services areas, Orica has high leverage to mining production volumes. In turn these businesses are driven by global IP cycles, although in recent times there has also been the issue of proposed mining tax changes in Australia.
In relation to mining tax, there has been important progress in relation to the government’s position since our last report. The various concessions by the Gillard government are clearly an improvement for the overall mining industry, albeit Orica’s exposure is greatest in the coal and iron ore segments, and these have still been significantly impacted. (It is important to note that Orica doesn’t incur more tax, but that the companies it services do).
Nevertheless, the government’s tax concessions are significant and as a consequence we do not envisage a major slowing of medium term Australian investment plans in coal and iron ore.
At the same time investors have been nervous that global recovery / growth is stalling – effectively pricing a negative outlook into equities over recent months. While we are witnessing some weakness in iron ore volumes / prices lately, the overall outlook is that strong Asian growth will continue to underpin demand growth for commodities into the foreseeable future – despite the lingering concerns over sovereign debt issues in Europe and the robustness of the recovery in the U.S.
Consistent with the observations above, late last month Orica announced that it was proceeding with an expansion of its ammonium nitrate production capacity at the Kooragang Island plant in NSW by 320,000tpa to a total of 750,000tpa.
As a first step, $75m is being spent on engineering planning and to secure long lead items. Statutory approval for the proposed expansion has been obtained from the government.
The company notes that the expansion complements its existing market position, as well as supporting the expected growth in mining in South East Australia where demand for ammonium nitrate is forecast to grow at least at an average annual rate of 8%.
The preliminary estimate of total cost for the expansion is in the range of $600m to $750m and it is expected that commissioning would occur in 2014/2015.
Other growth initiatives being undertaken or considered by Orica are:
- construction of an ammonium nitrate plant in Bontang, Indonesia
- investigation of the building of an ammonium nitrate plant in Peru – similar to the one in Indonesia – to meet Latin America’s growing demand
- construction of a 40 million unit per year detonator plant, in Nanling, China to service the growing Chinese market
- upgrading of the sodium cyanide plant in Gladstone, Queensland by a further 15,000 tonnes per annum to a total of 95,000 tonnes per annum
- upgrading of chlorine plants to meet strong demand in Australia
Earnings Outlook
The updated consensus earnings outlook for Orica is as follows:
| Year Ending 30 September | 2008 | 2009 | 2010F | 2011F |
|---|---|---|---|---|
| Revenue (A$m) | 6,544.1 | 7,455.5 | 6,800.8 | 6,943.3 |
| EBIT (A$m) | 970.1 | 1,082.5 | 1,110.5 | 1,181.5 |
| Net Profit after Tax (A$m) | 572.3 | 646.1 | 678.5 | 729.6 |
| EPS (cents) | 170.0 | 174.6 | 186.0 | 198.8 |
| P/E Ratio | 14.1 | 13.7 | 12.9 | 12.1 |
| Dividend/share (cents) | 94.0 | 97.0 | 99.9 | 105.9 |
| Dividend Yield | 3.9% | 4.0% | 4.2% | 4.4% |
Data sourced from Bloomberg
We note that following the demerger the proportion of Orica’s earnings generated in Australia will diminish to around 50%, thus reducing the potential to pay fully franked dividends on a longer term basis.
Discussion and Recommendation
The demerger of Orica has now been successfully completed and the segregated companies already appear to have added a small premium to their share price – potentially vindicating management’s strategy.
The ‘new’ Orica is a strong company provides leverage to mining volumes, rather than commodity prices – an attribute that should be well regarded in the current market which remains uncertain about the global economic conditions.
Orica has a strong track record of earnings growth and is inexpensive based on based on medium term earnings expectations. Hence, Stock Resource recommends Orica as a Buy up to $24.55 for Members with no current exposure.
The Chartist’s Perspective
Churning back momentum
Holding a widely ranging upward path from the 1980s, the share price for Orica experienced a slowdown in momentum when it approached the base of its 2007 -2008 top around $27.50 in April/May this year. So far the reaction has seen the price pullback towards $23 and we expect that there may be more volatility within the $24-26 range as the price attempts to recapture momentum.
As the phase develops there is the possibility that the price may weaken further towards $22 with back-up in the $18-20 range before the upward path can be resumed. To avoid this, the near-term churning would need to produce a move above $26.50 to boost a break away through $27.50 and an earlier return to the upswing. In this case, the potential along the upward path would be to $29 and into the $31-32 range and potentially significantly beyond.
The risk would be a drop below $18.
‘The Chartist’s Perspective’ has been independently derived by Regina Meani from charting and technical assessment, and has not taken into account fundamental analysis of the company.
Related Articles
- Orica 12 Oct 2011
- Orica 04 May 2011
- Orica 10 Nov 2010
- Orica 12 May 2010
- Orica 11 Nov 2009
- Orica 17 Jun 2009
- Orica 06 May 2009
- Orica 18 Mar 2009
- Orica 12 Nov 2008
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