Orica flags higher costs/inflation after posting strong FY22 profit

Orica (ASX: ORI) was up 4.5% at the open after the explosives manufacturer announced earnings (EBIT) for the year ended 30 September 2022 of $579m, up 36% of the previous year, and ahead of both UBS and consensus estimates of $542m and $546m respectively.

While the company guided to stronger earnings in FY23 on the back of continued strong demand for its products, management warned of higher energy costs and inflation hitting the business.

Overall, management attributed a net profit after tax (NPAT) jump of 52% to $317m, on sales up 29% to $7.3bn, to improved market conditions and the company’s revamped strategy for the year to 30 September 2022.

Today’s strong result was accompanied by a final dividend of 22 cents per share (CPS), versus 16.5 CPS in the previous period and total dividends were 35 cps for the 12 months to September 30.

Organic growth

Orica's CEO Sanjeev Gandhi reminded investors of the company’s plans to continue to pursue organic growth from blasting and by expanding Orica’s presence across future-facing commodities.

“Beyond blasting, we are accelerating customer adoption of our new technologies and demonstrating our strengths and capabilities in providing integrated digital workflows, from mine-to-mill,” Gandhi noted.

“Mining Chemicals also continues to present growth opportunities for our business.”

RONA in double-digits

In addition to strong earnings growth in all regions the company also received $90m on its decision to exit its Russian business, and $33m on its Turkish operations.

Return on net operating assets, a key measure of how efficiently Orica is using its assets, increased to 11.4% in the current financial year from 8.1% in FY21.

An equity raising during the year of $691m helped to the lower gearing level at September 2022 of 19.7%, below the target range of 30 to 40%.

Highlights the full year

• Statutory NPAT (after individually significant items) $60.1m.

• Underlying earnings per share of 76.4 cents, up 49% on the previous period.

• Sales volumes of ammonium nitrate were up 4% on the previous year.

• Sales of electronic blasting systems up 10% due to increased mining activity globally.

• Capex on “sustainability and sustenance” projects will be between $400m and $420m, higher than the previous year.

• Digital solutions adoption rate globally up 63% on the previous year.

Outlook

Due to anticipated growth in commodities demand and increased adoption of new technologies, management expects the FY23-FY25 3-year average return on net assets (RONA) to be 10.5 – 13.0%.

In addition to announcing the acquisition of Axis Mining Technology to further strengthen orebody intelligence capabilities back in August, the company has introduced a suite of new products and services to the market.

What brokers think

Orica’s share price is down -8% over one year.

Consensus on Orica is Moderate Buy.

Based on Morningstar’s fair value of $15.50 the stock appears to be undervalued.

Based on the seven brokers that cover Orica (as reported in by FN Arena) the stock is trading with 13.3% upside to the target price of $15.95.

UBS attributes the stock’s year-to-date share price outperformance to improved nitrogen pricing given global gas shortages, with Australian ammonium nitrate ions per particle (IPP) prices at record highs of around $1,200/t.

The broker retains a Buy rating and $18 target.

Credit Suisse expects mixed demand across regions and poor weather across Australia to impact Orica and has cut its target price to $14.55 from $16.67.

The broker retains a Neutral rating.