Price Movement
Orica (ICI
Australia before 1997) was the
darling recovery stock last year. It
touched a low of $4.04 in June
2001. Between June 2001 and
December 2002, it rebounded 260
per cent to $10.50. But longsuffering
shareholders who had
bought the shares from ICI Plc
when they had sold their shares in
ICI Australia at $11.95 are still
waiting for the good times to start.
The share price recently dropped
to $8.15 and presents an
opportunity to assess whether it
has value or is overpriced.
Profile
Orica runs its businesses
along four main divisions: Mining
Services (explosives), Agricultural
Chemicals (fertilisers), Consumer
Products (paints) and Chemicals.
Mining Services is one of the
world’s largest manufacturers of
commercial explosives for the
mining, quarrying and construction
industries. Agricultural Chemicals
is its Incitec shareholding, which is
one of Australia’s leading
phosphatic and nitrogenous
fertilisers. Consumer Products
includes household brand names
such as Selleys, Dulux, Levenes and
British Paints. The Chemicals
division provides industrial
chemicals for a range of uses, from
water purification to adhesives and
resins for wood panels.
Current details
Much of the
rebound in its share price from its
2001 lows has been attributed to
the appointment of Malcolm Broomhead as chief executive
officer. He quickly rationalised noncore
activities and introduced cost
efficiencies and controls. As a
result, the company’s 2001 $193
million loss was turned into a $213
million profit for the full year to
September 2002. Market
expectations for 2003’s net profit
are between $250 million and
$260 million. This places it on a
P/E of 9 and a yield of 5.25 per
cent (partly franked).
The share price has dropped for
several reasons. The $334 million
price tag for the acquisition of
minority interests in Incitec (ASX
code ICT) was more than the
market expected. However, the
main shock to the market has been
the company’s exposure to the
drought (lower fertiliser sales) and
oil price increases (higher
manufacturing costs). Another area
of concern has been its 50/50 joint
venture – Quenos – with Exxon
Mobil, making synthetic rubber and
plastics. Quenos has had
production curtailed as a
consequence of the NSW bushfires.
Sector
Orica is in a strong position
for the ongoing rationalisation of
the fertiliser industry. It now owns
Incitec and recently Incitec
concluded a merger with the cooperative
Pivot, which will soon be
listed on the exchange. WMC
Resources and Wesfarmers are the
other listed fertiliser producers.
Worth buying?
Even if profit
forecasts are too optimistic, it still
appears to be cheap. Its March
half-year profits are expected in
May and traditionally this profit is
weaker than the second half.
However, dividend franking levels
should improve with an income
yield of 5.25 per cent and with
latent growth potential. So
investors can be paid for waiting.
Geoffrey Hill is presenter of ABC
News Radio’s daily afternoon
finance report and is an
independent private client adviser.
Email gh@ghill.com.au
