13 Feb 2013 | The Age
What's new Orica's share price has trailed the market during the past year. In our view, one of the big reasons for the underperformance stems from market concerns over its Minova business, which provides ground support and tunnelling technology mainly for the underground mining sector.

In its fiscal 2012 results, Orica wrote $367 million off the carrying value of Minova, which was substantial value destruction given it bought the business before the global financial crisis for $870 million. Minova is suffering intense competition and soft demand, so much so that management has flagged a 20 per cent decline in Minova's earnings in fiscal 2013.

Other factors behind Orica's relatively subdued stock performance include: a costly run of environmental mishaps, the shutdown at the Kooragang Island ammonia facility in 2011, and the ongoing legacy issues at the Botany Industrial Park.

Outlook It is worthwhile putting Minova's woes in context. The division now contributes only about 10 per cent of Orica's total earnings before interest and tax. Furthermore, Minova is still the global leader in what it does. It boasts strong cash-generating power and will be gradually (albeit belatedly) integrated into the Orica structure during the next three years. With market expectations for this business so low, any tangible progress from these initiatives is likely to be taken positively.

As for the Botany plant legacy issues, while environmental mishaps never look good in the newspapers, Orica has shown its commitment to dealing with the problems and has already provided for the cost of fixing them. The Kooragang Island ammonia facility is on track to begin construction in 2014.

Longer term, we have a positive view on commodities demand and prices, driven primarily by emerging markets' continuing industrialisation. This provides a strong demand for Orica's mainstay explosives division, as well as its Minova underground support and tunnelling division — two businesses that are global market leaders.

Price Orica's stock price has increased more than 8 per cent during the past 12 months. While a solid performance, it has trailed the surge in the overall market. The underperformance is especially acute during the past three months when compared with a number of other mining services companies, whose stock prices are up 20 per cent to 30 per cent.

Worth buying? In our view, the company-specific problems are now well known and largely discounted by investors. Orica is trading at 13.4 times fiscal 2013 consensus earnings per share estimates, and 8½ times earnings before interest, taxation, depreciation and amortisation estimates. We believe the market is overlooking the underlying strength of Orica, which is a global leader in the provision of essential services to the mining sector. The company boasts a solid balance sheet and return on equity profile, with substantial leverage to the commodities and mining sector. We believe the stock is worth buying.

Brian Han is senior research analyst at Fat Prophets sharemarket research.

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