Orica (ORI) Recommendation

Submitted by Craig Strzelecki on 12 July, 2007 - 18:00

Orica (ORI) have a reiterated Outperform recommendation and a valuation of either $31.56 on a DCF basis and $32.52 on a sum of parts basis from Australian stockmarket analyst Macquarie Research Equities. The company have revealed that it has missed out on the DSI acquisition, with the private equity firm CVC acquiring the business for a reported sum of in excess of €1bn. Orica shares sunk on the news, but have today recovered as investors reassess the outlook for the stock after the failed transaction. The analysts still like the outlook for ORI, and reiterate their outperform recommendation and highlight the potential for another private equity bid beyond the prior $32.00 offer. Financial discipline being shown. It is positive that ORI is showing financial discipline in not pursuing acquisitions at a price which does not meet its 18% Return on Net Assets (RONA) criteria. Capital management must now be high on the agenda. ORI has ~$1bn of debt capacity to pursue acquisitions, growth options and/or capital management. The analysts would expect now to see Orica (ORI) to move swiftly to complete its existing buyback program (~$100m remaining). ORI's last buyback notice was 18 June, so presumably the buyback has been on hold pending an outcome on DSI. In the absence of other acquisition opportunities, ORI clearly has capacity for larger capital management (a $1bn buyback would be equivalent to 10% of issued capital). ORI’s capital management potential should come to the fore particularly with the stock at sub $30 and ORI having rejected a $32 bid. Private equity likely to remain attracted by ORI’s undergeared balance sheet. Ironically, ORI missing out on DSI is likely to keep private equity interested in ORI as it remains undergeared with gearing of only 32% (vs ORI's 35–45% target and ~75–80% which PE would gear to). ORI's M&A focus may turn to WES' CSBP, which in a recent report, the analysts valued at $1.3–1.6bn. As with DSI, ORI faces the same issue in that it is difficult to find acquisitions in this environment that meet its strict 18% RONA hurdle. The analysts still thinks that there is potential for a higher private equity bid to emerge beyond the prior $32 bid. MRE said at the time that PE could pay $34.80 and still achieve a 15% IRR. MRE’s underlying valuation for ORI (ie ex the bid) is $31.56 on a DCF basis and $32.52 on a sum of parts basis.

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!

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