Orica Limited Update

Submitted by Craig Strzelecki on 19 April, 2007 - 19:14

Orica Limited currently has a restricted call and share price target from analyst UBS. However, sharemarket analyst Citigroup Investment Research has set a Buy recommendation and a target price to what they believe private equity can pay for Orica - $38.20. Management’s rejection of the PE bid at $32.00 has opened the auction: they expect Orica will be sold to private equity within the next 6 months. Key assumptions in deriving Citigroup's estimates of private equity based pricing include gearing of 65% (interest cover of 1.5x), $60m of cost savings ($25m from overheads), and re-listing the company in 4 years at an 11x EV/EBITDA multiple. This generates a 15% return for PE investors.Their Buy recommendation has been based on its view of the industry, Orica’s position in the industry, and company-specific issues. The analysts are cautious but not overly concerned by environmental issues at Botany, and over-capacity risks in Australia in the next few years. Citigroup's sum of the parts valuation is now generating $32.00 (previously $27.00) as a result of the increase in global peers and the domestic market. Variations to their base case for what PE will pay for Orica generate prices of $34-$40/share.

Meanwhile, analyst UBS has observed that Orica (ORI) has rejected a A$32 per share approach by a private equity consortium. The approach was pitched well above market consensus valuations, but only at a 15% premium to Tuesday's closing share price. As with most private equity arbitrages, they see Orica's lazy balance sheet as the key driver for this approach. Other issues that could have been missed: In addition to gearing, the analyst sees a fair degree of value optionality in Orica's land bank and consumer division. Given Orica has spent 2.5x depreciation on capital investment and A$1.7bn on acquisitions over the past two years, the analyst also sees now as an opportune time for a potential acquirer. This capital investment is the main driver of our forecast 20%pa growth in EPS over the next three years. The approach implies 12x 08E EBIT: On the analyst's forecasts, the approach implies 12x FY08 EBITA, up from Tuesday's close of 10.5x. Dyno Nobel's share price reaction now prices it at 11.8x June FY08E EBITA. Using this as a value proxy for Orica's mining services business implies that at A$32, all of Orica's divisions are being priced at 12x EBIT, or an 8% discount to the Australian All Industrials average.

Orica Limited is listed on the Australian Stock Exchange (ASX) under stock code ORI. You can view their investor website here. ORI was listed on the ASX on 28 November, 1961. Orica is the world's leading supplier of commercial explosives and is also the largest chemical company in Australia and New Zealand. It manufactures and supplies commercial explosives, industrial and specialty chemicals, decorative paints, and plastics. Orica has significant operations in Australia, New Zealand, South East Asia, North and Latin America. Orica Mining Services offers commercial explosives, initiating systems and Blast-Based Services to the mining, quarrying and construction industries. The business is run globally with a presence in Australia, Asia, Europe, the former Soviet Union, Africa, the Middle East, North America and Latin America. Orica Consumer Products is Australia and New Zealand’s leader in decorative, preparation, and lawn and garden care products. The business manufactures and markets icon brands including Dulux, Berger, British Paints, Levene, Walpamur, Cabot’s, Feast Watson, Intergrain, Acratex, Selleys, Rota Cota, Poly, Turtle Wax, Yates, Thrive, Zero and Dynamic Lifter in Australia and New Zealand. Chemnet is Australasia’s leading trading and distribution solutions business, servicing more than 40 key industries. The business is based in Australia and operates in New Zealand, China, Hong Kong, Fiji, Indonesia, Thailand, Malaysia, Singapore, Peru and Chile. Chemical Services is a major supplier of chemicals, services and technology to the water treatment, mining chemical and industrial chemical markets. The business is based in Australia and has operations in the United States and the United Kingdom. Donald Mercer is the Chairman of Orica and Graeme Liebelt is the CEO. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade ORI. Check your charts and good luck with your share trading!