Orica is expecting the current strong market performance to continue into 2H23 on the back of growth in commodity demand and traction from its strategy in technology solutions.
Result. 1H23 underlying net profit $164m was 6% ahead of consensus. Underlying EBIT $323m was up 32% on pcp and 6% ahead of consensus. An unfranked 18cps dividend was declared compared to 13cps in 1H22.
All regions delivered improved performance as demand for product pushed up volumes regardless of wet weather in Australia and North America. ORI’s acquisition of Axis Technologies and the increased focus on technology solutions is also working.
Volume added $35m to underlying EBIT growth while mix and margin added $37m.
Full year capex guidance of $400-420m remains in place after 1H23 capex amounted to $154m.
Outlook. Less seasonal earnings and stronger internal discipline will contribute to on-going improvement in EBIT. Growth in global commodities demand, particularly for future facing commodities, is underpinning volume growth. But ORI remains guarded on the risk relating to geopolitics, higher energy costs, and supply chain disruption. The balance sheet is in good shape with gearing below the target 30-40% range. Low ammonia prices are hurting the inventory value and could persist to the end of CY23.
Investment View
ORI is executing very well and the demand for commodities is driving sustained demand for ORI’s products. But the global ammonia market remains fragile with security of supply still a challenge. If ORI can navigate this, then the earnings outlook remains positive. The strategy to enhance the technology solutions for an increasingly ESG-aware market is proving astute. The recent acquisition of Axis Technology is an example of how ORI is moulding its offer towards providing more sophisticated solutions to its customers.
The key to recent performance has been commercial discipline on re-pricing contracts and so far, this has proved worthwhile.
Higher interest costs are weighing with an $82m expense compared to $43m in the prior period and $54m in 2H22.
ORI’s PE ratio has been range bound for some time now and while the improvement to commercial discipline is good, it is incremental value rather than step change. The market will see this event in a positive light and upgrades are likely, but much of the news is priced in, in our view.
Risks to Investment View
Changes to input prices for AN ingredient (mainly natural gas) or demand from customers for ORI’s main products and services would affect earnings. Global activity in mining and agricultural activity would also affect earnings if demand changed.
Recommendation
We have retained our Hold recommendation.
Figure 1: ORI 1H23 RESULT
Figure 2: ORI PE RANGE BOUND BETWEEN 17-21X
Figure 3: ORI IS MODESTLY EXPENSIVE RELATIVE TO THE MARKET
