The market gave a thumbs down to Orica’s interim result, even thought it seemed reasonable.
In fact the thumbs down started last Thursday in the sharp little pre-holiday sell down, and it continued yesterday with the shares starting lower than Thursday’s close and heading lower all day.
The shares ended off $1.13, or more than 3.5% at $28.87, the day’s low.
Orica reported a 7% rise in net profit for the March 31 half of 2008 after significant items to $225 million, but when they were excluded, earnings after tax were up a more encouraging 13.1% to $230 million.
The company reaffirmed its previous guidance that earnings would be higher in 2008 than in the 2007 year, but no estimate of the increase was given.
"Despite some adverse impacts from rising input costs and foreign exchange, our businesses continue to perform to expectation. Accordingly we see no reason to change our prior outlook statement in that Group net profit (before significant items) in 2008 is expected to be higher than that reported in 2007," the company said in a presentation slide for analysts.
Orica declared an interim dividend of 39c, of which 14c is franked. This is 3c up on the prior corresponding period.
CEO Graeme Liebelt said the company had reduced the volatility of its earnings.
"Our long term strategy of pursuing leadership positions in markets offering higher growth has reduced the volatility of our earnings and, importantly, positions us to benefit from the stronger for longer demand in global resources and infrastructure markets."
Mr Liebelt said the current result continued Orica’s growth momentum and showed the resilience of its earnings stream in the face of mixed market conditions and a deteriorating global economy.
"The firm underlying earnings growth across all of our businesses despite some adverse weather conditions, unfavourable exchange rates, delays in resource projects and rising input costs reveals the strength of our business model," he said.
The group’s sales revenue increased 11% to $3 billion for the half year to March 31.
Mr Liebelt said the mining services division had a record result, with an 11% increase in profit from modest growth in volumes in Australia and Asia and reasonably favourable conditions in most major mining and resource markets.
"Importantly, as the global market leader and with our volume exposure to the resources cycle, we anticipate strong long term earnings as resource companies investments move into the production phase and infrastructure constraints are eased," he said.
"Given the tightening in global ammonium nitrate supply, we are actively pursuing expansion opportunities in Indonesia, Latin America and Australia."
The integration of the Dyno businesses continued with synergies being delivered ahead of plan, he said.
"Annualised synergies delivered to date total $80 million and we are on track to deliver the full $90 million, a year ahead of schedule."
He said consumer products achieved underlying earnings growth of 14% to a record $60 million, primarily driven by increased sales revenue and improved productivity.
Recently acquired business, Minova, posted an earnings increase of 268% to $64 million, with the benefit of an additional three months contribution from the base Minova business and a five month contribution from Excel, he said.
The chemical services division posted underlying earnings growth of 25% and the Chemnet business recorded a 13% rise in to $36 million.
But there were some imponderables for the result. The extra contribution from Minova and Excel helped boost earnings, as acquisitions should, but it does show that the pre-existing businesses had some troubles.
Debt and the interest bill was higher because of the company’s recent acquisitions of Minova and Excel and several smaller bolt on buys. The company’s interest bill jumped $35.6 million in the half as net debt grew to $2.184 billion from $1.233 billion at the end of the first half of the previous year.
As a result of this acquisition campaign gearing is high and the company’s Triple B-plus credit rating might come under pressure.
So this comment in the report was understandable:
"In the current uncertain financial environment and given significant M&A activity over the past 18 months, Orica’s businesses are predominantly in a period of consolidation."
That means no more buys, conserve cash and pay down debt.
Working capital was under pressure during the half thanks to the higher interest bill and in the brokers presentation the company said that among its priorities for 2008 were:
"Priority for second half –improved trade working capital management and cash generation; restoring gearing to our target range; credit rating –committed to BBB+ “
“Orica successfully refinanced all of its bank debt in December 2007 with the following key outcomes:
"Increase in overall limit by A$300M to A$2.3B (currently A$1.4B is undrawn);, Increased tenor: 1 year tranche significantly reduced, 3 year tranche increased and a new 5 year tranche added;Multi currency, flexible and cancellable at Orica’s option; and-Margin increases of approximately 20 bps.
‘"To minimise interest costs, at this stage, short rather than medium to longer term facilities have been drawn."
That’s because the medium term money is cheaper than the short term loans. That’s good capital management but a sign of a company that knows its interest bill and debt are too high.
But the market seems worried that Orica might look to raise money from shareholders. After all, it’s becoming the rage overseas
