Orica slides further on downgrades

Chemical giant slides further on four downgrades from several major brokers after its profit warning last Friday.

Four major broking houses have downgraded Orica after the chemical giant issued a last-minute profit warning before earnings season on Friday.

Macquarie, Goldman Sachs, Credit Suisse and UBS cut their recommendations for the stock to "neutral", each believing Orica's $18.20 share price at Friday's close to be around fair value on a price-earnings basis given the company's greater earnings risk.

The downgrades sent Orica's shares falling 3.7% to $17.52 at 1319 AEST, extending its pummelling to 17.1% over the course of two days.

Areas of particular concern for the brokers include potential oversupply of the ammonium nitrate market in the Asia Pacific, whether Orica's Australian operations can still hold up in the face of weakening coal prices and the inexplicable magnitude of the earnings miss.

"We have difficulty in explaining the magnitude of the downgrade, given recent data shows volumes in the core Australian and Indonesian markets continue to grow and US coal and quarry volumes are starting to improve," Goldman Sachs said.

Orica slumped by 13.4% on Friday after announcing that it expects net profit to be 10% below the previous corresponding period's $650.2 million. This would mark the first time the company has not achieved profitable growth in over a decade.

However, JP Morgan and CIMB Securities retained their overweight ratings despite cutting their price targets. CIMB is the most bullish with a one-year price target of $24.90, seeing the sell-off as an opportunity to buy.

"Many of the issues are expected to normalise into 2013-14 and the core business is again proving its defensive thesis," CIMB said.

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