Orica (ORI) showed why a private equity buyout group thought it was a steal at $32 a share and why it remains good value at prices above that.
To put it simply, the company’s move deeper into mining services is paying off with a surge in earnings from existing and newly acquired businesses.
And with the China resources boom showing no sign of slowing and the number of new projects growing there’s going to be an ongoing need for the chemicals, explosives and other services that Orica’s managers can devise.
Along with the likes of Leighton, Campbell Bros, Worley Parsons, Transfield, United Group and Downer EDI, Orica has rapidly moved beyond the confines of Australia on to the world stage.
It is more global in approach and the span of its businesses than the bigger Leighton.
Orica said interim earnings in the six months to March 31 jumped 39 per cent to $203.1m, (from around $130 million in the same period of the 2006 year) a result that was boosted from purchase of parts of the business of Dyno Nobel and the Minova mining services company.
Orica said sales rose by a headline 4 per cent to $2,701.7 million for the first six months, but were up by an underlying 17 per cent once the impact of acquisitions and disposals were factored in.
Net after tax earnings (including significant items) for the six months to March 31 was up 71.1 per cent to $210.4 million.
Cash flow from net operating activities improved by falling from $273 million to $256.2 million from lower spending and lower working capital needs.
The results will go a long way to justifying the rejection of the buyout offer from a group including US private equity predators, Bain Capital and Blackstone.
Orica shares hit a high of $34.86 in the wake of the buyout offer’s rejection as punters bet there would be a higher offer.
Orica said the full-year profit will be higher than in 2006 (which is a given after this result) but the shares dipped below that the $32 level as investors appeared to rule out the prospects of a new, higher offer.
Orica shares dropped by 73c at one stage to $31.38 on the ASX before recovering to end around $31.50, off 61c on the day.
Orica declared a 36c a share interim dividend, up 10 cents from the 2006 interim payout. The interim dividend will be franked at 14 cents per share.
In its statement to the ASX Orica explained the result this way:
“The record result from Mining Services underscores strong trading conditions in the global mining and resource market. We believe this trend will continue as customers in the resources sector strive to increase their volume of output, both from existing and new mines.
“A record result in Mining Services with EBIT up 62% to $245M, reflecting strong conditions in all regions and the continued successful integration of the Dyno Nobel businesses. There was a positive start by Minova which continues to trade strongly in buoyant markets.
“What is also most pleasing is the way in which the significant acquisitions of Dyno and Minova have contributed to the earnings result.
“The integration of Dyno continues to progress well and synergies are being delivered faster than expected while Minova has made a positive start since joining the group from 1 January 2007.”
“With the ongoing integration of Dyno and now adding Minova to the portfolio, Orica has become the true global leader in the Mining Services business with over 25% market share, which is more than double our nearest competitor.
“We now have operations in more than 50 countries and sell into twice that many, allowing the company to benefit from both geographic and market growth opportunities.”
“The improved result in Consumer Products reflects the benefit from investing in enhancing the competitive position of the business over the past 12 months”, CEO, Graeme Liebelt said.
“Earnings from the Chemical Services division were slightly ahead of last year with the benefit of ongoing market growth in Mining Chemicals offset by a lower contribution from Watercare which was, in part, impacted by the drought,” the company said in its statement on the results.
It said sales revenue increased by $103M (+4%) to $2,702M with underlying revenue (excluding acquisitions, divestments and foreign exchange impacts) of $2,586M improved $383M (+17%), driven primarily by: – Ongoing growth in Mining Services due to strong demand in all regions; – Additional revenue contribution from Dyno of $312M; – Revenue improvement in Chemical Services due to increasing demand for sodium cyanide in the Mining Chemicals division; and – Market share increases and general market growth in Consumer Products.
“That was offset by, a reduction in Chemnet revenue of $35M; Revenue also decreased by $41M due to unfavourable foreign exchange rates. (A sign for the rest of the year and 2008 from the rising Aussie dollar).
“· Total EBIT increased 25% to $346M (pcp: $276M) primarily due to: – EBIT from acquired businesses, including synergies, of $71M (Dyno $54M and Minova $17M); – Improvement in underlying earnings from Mining Services of $41M, reflecting growth in all markets and the ongoing benefits of the Yarwun AN expansion; – Improvement in underlying earnings in Consumer Products (market and market share growth), Chemical Services (Mining Chemicals) and Chemnet (benefits of last year’s restructure).
“The record result from mining services underscores strong trading conditions in the global mining and resources market,” the company said. “We believe this trend will continue as customers in the resources sector strive to increase their volume of output, both from existing and new mines.”
Orica bought the Dyno Nobel assets for $685 million in 2005 and it paid $857 million last October for mining services company Minova to increase sales to China.
Both were good deals and are paying off for Orica
