Orica
Recommendation
Although revenue for the half year to 31 March 2012 rose 12% to $3.3bn, Orica reported a 4% fall in net profit to $253m. From earnings per share of 67.9 cents, a partly franked 38 cent dividend was declared (ex date 28 May). The profit fall came mainly from a $90m loss incurred from the closure of the company’s Kooragang ammonia plant after chemical leaks were detected. A combination of higher volumes and higher margins mostly offset that loss, demonstrating the strength of the business at this point in the cycle.
Half-year ending 31 March | 2012 | 2011 | Change (%) |
---|---|---|---|
Revenue ($m) | 3290.7 | 2949.3 | 12 |
Net profit ($m) | 253.3 | 263.8 | (4) |
EPS (cents) | 67.9 | 71.1 | (5) |
DPS (cents) | 38.0 | 37.0 | 3 |
Franking (%) | 36.8 | 48.6 | n/a |
One negative was operating cashflow, which fell from $142m last year to just $39m. The main contributor to the decline was a 75% increase in ‘Trade working capital’—Orica had more bills to pay this year than last. Cashflow will be an item to watch in the full year result.
Sheltered by the commodities boom, new chief executive Ian Smith was unsurprisingly upbeat, especially about the booming Western Australian iron ore market, where tens of billions of dollars are being spent to lift output. Iron ore currently contributes just 3% of earnings before interest and tax (EBIT)—compared with 25% of EBIT from coal, another explosives-heavy bulk commodity—so Orica sees an opportunity to increase its iron ore business. The Wesfarmers-owned CSBP and Dyno Nobel no doubt see the same opportunity, so the scramble to supply the west with explosives will be highly competitive. Although the share price has fallen slightly since Exploding myths about Orica on 04 Apr 12 (Avoid - $26.99), it still anticipates growth conservative investors shouldn’t pay for. AVOID.