Orica (ORI) Update

Submitted by Jim Thesiger on 14 May, 2008 - 14:46

Orica (ORI) has a price target of $32.30 from Australian stock analyst UBS

Yara to proceed with Burrup AN plant

New 350kt ammonium nitrate (AN) plant:

Global fertiliser group, Yara International, has announced a Memorandum of Understanding with Burrup Holdings to build a new 350kt AN plant on Western Australia's Burrup Peninsula. Yara will handle the marketing of the AN, which represents its first entry into the Australian AN market.

Regional oversupply temporarily emerges in 2012:

Our regional supply-demand forecasts already incorporate additional AN capacity from a new plant in the Pilbara, Orica's Indonesian plant, and our assumption that Incitec will re-start Dyno's Moranbah project. These projects will see regional supply jump by just under 60% over the course of 2011 and 2012. However, we believe regional commodity volume growth is likely to accelerate over the next 5 years, which will see explosives demand of c.9-10%pa. This assumption sees a regional oversupply emerging in 2012, but this eases very quickly.

Likely to impact sentiment on Orica:

Despite our analysis within, additional AN capacity is usually a negative for Orica sentiment. Asia-Pacific explosives accounts for one-third of Orica's group EBITA. Our expectations for an acceleration in commodity production growth is likely to be ahead of the market, but this is based on significant new investment in iron ore supply in WA and the easing of infrastructure constraints in Eastern Australia.

Valuation A$32.30 (unchanged)

Our DCF valuation is A$32.30 and price target is A$34.40 based on Valuation x (1+WACC) - Dividend

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