ASX Code: ORI
Security price: $21.04
Industry: Mining services
Forecast distribution: 95c per share, 40 per cent franked
The outlook for explosives company Orica has fizzled as the mining slump hits earnings.
The company recently disappointed the market with a below-expectations interim profit result. But despite those challenges, a pretty solid dividend yield is underpinning its shares.
Orica is transforming its operations in an effort to become more resilient. And it should benefit from both a falling dollar and a potential infrastructure-spending surge in Europe. This makes the stock a solid option for patient income investors.
Orica is the world’s largest supplier of commercial explosives to the mining and infrastructure market. It operates in over 50 countries and has a 28 per cent global market share.
The mining services segment includes the manufacture and supply of commercial explosives and blasting systems to the mining, quarrying, construction and exploration industries.
The segment also includes the provision of ground support services in mining and tunnelling. Orica recently offloaded its chemicals business.
But like many other service providers, the mining downturn has hit hard. Orica’s CEO recently described market conditions as “unquestionably difficult”. Global markets are volatile, so Orica isn’t providing a 2015 profit guidance.
The tough conditions have affected earnings. In May, Orica announced a 3 per cent fall in first-half net profit to $211 million, revenue flat at $2.8 billion.
But it’s not all gloom and doom. Orica’s new challenge is to build earnings resilience in the downturn. It is taking action with a “transformation program” that includes cost-cutting and contract renegotiations. This program is starting to gain traction.
Orica should also benefit from a fall in the dollar at some point and we expect it to benefit from infrastructure rollout in Europe. The company’s balance sheet is also in good shape, with gearing falling from 36.5 per cent to 29.4 per cent in the first half.
Orica declared an interim dividend of 40c per share, franked to 14c per share. It is forecast to pay a total full-year dividend of 95c per share, around 40 per cent franked, which gives a healthy 4.5 per cent yield.
At $21.04, Orica is trading slightly above our forecast value of $18.07 but remains an option for income-focused investors.