Chemicals and explosives group, Orica (ORI), shares surged more than 10% in yesterday’s up/down market after the company reported a better than expected 2012-13 profit and a small lift in dividend.
The $2.08 rise to $21.62 came despite the company issuing an uncertain outlook for the 2014 year.
Directors told the market they expected the underlying result to improve on the $600 million plus reported for the year to September 30, but added "however volatile market conditions add a greater degree of uncertainty".
That’s a sentiment plenty of other companies can agree with as they look out into the next year (perhaps with the exception of the big four banks).
But investors ignored that conservatism and looked at the absence of any more write downs or damage in the company’s mining services division.
So shareholders bid the shares higher yesterday because the absence of shocks in the mining services division after the downturn in mining activity in 2013 in Australia, Asia and North America.
Another bullish point was the news the company hasn’t had any trouble integrating its Minova ground support business into the mining services division – even though that cost the company $29 million in integration costs in the year and amid further weak demand.
Orica reported net profit of $602 million for the 12 months to the end of September, up more than 49.4% from last year’s $403 million, which was skewed by $247 million in writedowns.
However, the 2012/13 profit was $48 million lower than the previous year once the 2012 write downs were excluded.
Total 2013 revenue was up 3.4% to $6.9 billion, despite weakness in the company’s ground support business and subdued demand for chemicals.
The company will pay a fully-franked final dividend of 55c per share, taking the full year dividend to 94c, up 2c, or 2% from last year.
That’s a payout ratio of only 57.4% for the year (the big four banks are above 70%).
Earnings before interest and tax (EBIT) were $985 million (4% below 2011-12’s $1,023 million). Earnings before interest, tax, depreciation and amortisation (EBITDA) were steady at $1,269 million, the company said.
Net operating cash flows at $1,059 million rose from $544 million in the previous year, a solid sign as the company cut working capital requirements and improved creditor terms in some markets.
"The strategy of promoting product and service differentiation has led to an increased contribution from Mining Services across its explosives markets. Mining chemical products improved on the back of better plant performance," the company told the ASX.
"Ground support markets were much weaker than expected in the second half of the year which led to an acceleration of the integration of the business into Mining Services. This program was completed by the end of the financial year with the costs included in the 2013 Financial Year.
"Chemicals EBIT was $92 million, 8% below pcp, due to subdued demand. Depreciation and interest charges were higher for the year," the company said.
Orica also had other news yesterday that investors liked: it has met concerns the company might have problems obtaining enough gas in the latter years of this decade for its chemicals plant in Newcastle.
The company revealed yesterday that it had entered a three-year gas sales agreement with Esso Australia and BHP Billiton to purchase up to 42 petajoules of natural gas from Longford in Victoria beginning in 2017.
It will be the first time the company has bought gas from the Bass Strait partners.
“This important agreement with Esso/BHP Billtion gives Orica security of gas supply to the end of the decade for our Kooragang Island manufacturing facility from a highly reliable supplier,” chief executive Ian Smith said.
