Orica: Re-Contracting Into a Tighter Explosives Market Underpins Core Growth

Our AUD 16.50 fair value estimate for no-moat Orica ORI stands. Our fiscal 2023 EPS and DPS forecasts are unchanged at AUD 0.85 and AUD 0.42, respectively. The dividend equates to a modest 2.7% unfranked yield at the current share price, on a modest 50% payout. Orica shares currently trade 8% below levels prevailing when the fiscal first-half results were released and at AUD 15.40 are somewhat undervalued, though still in 3-star territory.

Customers seeking productivity gains and sustainability outcomes are driving increased adoption of premium products and new technology, which we expect to ultimately reflect in Orica’s bottom line. More generally we also see explosives re-contracting into a tighter market and easing labor and supply chain tightness as underpinning core growth. Explosives re-contracting has already seen impressive price increases since end-fiscal 2021.

Our fair value equates to an underlying fiscal 2027 EV/EBITDA of 6.8, a P/E of 14, and an unfranked yield of 3.6%. We project an unchanged five-year EBITDA CAGR of 10% to AUD 1.4 billion by fiscal 2027. This is achieved on an improvement in EBITDA margin to a midcycle 19%. We still expect more uptake of technology-based productivity solutions to improve Orica’s EBITDA margins from a five-year historical average of 15%, including the cost inflation-affected 12% for fiscal 2022 and first-half fiscal 2023.

The world’s largest explosives provider hasn’t announced any material news since fiscal half-year results in mid-May 2023, and isn’t due to report full-year earnings until Nov. 9, 2023. At the last update, Orica flagged a strong fiscal 2023 second-half performance, though with seasonality of earnings to be less skewed to the second half versus fiscal 2022. The underlying first- to second-half EBIT split in fiscal 2022 was 37/63. Our fiscal 2023 forecast still anticipates a 44/56 first- to second-half EBIT split, driving a 23% increase in underlying fiscal 2023 EBIT to AUD 709 million.