Orica soars on back of 25% revenue growth

After a run of poor results, Orica (ASX: ORI) finally gave the market something sweet to chew on after the world’s largest explosive maker posted an improved half-year underlying earnings (EBIT) of $245m, up 56%.

What isn’t included in these numbers is the contribution from Orica’s recently offloaded Minova business, which adds a further $14.7m to Orica’s first half earnings.

While much of the improved result is being attributed to a hefty commodity price surge in the half - leading to a corresponding uptick in demand for the company’s services in Australia, Indonesia and Latin America – management was also quick to flag rising input costs that have been impacting the business.

Overall, after booking an $80m impairment to its European business - following the company’s decision to exit Russia - and $33m of impairments against its business in Turkey, Orica booked a net loss of -$84.6m for the half.

Management notes higher revenue also reflects “price improvements in new contracts and contract renewals broadly offset impact from input cost increases,” and an improved product mix with more customer opting for premium products.

Despite the S&P/ASX 200 being down around -1.2% after lunch today, Orica was one of the market’s top performer’s, up 7.72%.

Highlights of the first half result included

• 3c a share interim dividend, representing a payout ratio of 41% (payable 8 July 2022)

• Revenue up 25% to $3.3bn for the half-year to the end of March

• Underlying profits grew by two thirds to $129.2m, and was a 20% beat compared to consensus

• Net debt of $1.6bn

• Gearing at 38.3% (within the target range of 30 to 40%)

• Ammonium nitrate (AN) volumes of 2.0m tonnes up 5%

Value drivers

CEO Sanjeev Gandhi believes Orica’s half year result reflects relentless efforts to improve performance, in line with the refreshed strategy outlined in November 2021.

“Focusing on three value drivers that align with Orica’s strengths, the refreshed strategy aims to deliver solutions and technology that drive productivity and innovation for customers and provide enduring value to shareholders and other stakeholders,” Gandhi noted.

“We maintained a disciplined approach to our balance sheet and capital management which resulted in our gearing ratio remaining within target range, despite the expected increase in trade working capital from rising input costs.”

Outlook

Gandhi expects steady commodity growth, particularly in gold, copper and quarry and construction in the second half to continue to drive demand for products and services.

Despite the planned exit from our operations in Russia, the supply chain challenges associated with Russia-Ukraine, and the divestment of Minova, Gandhi expects the momentum in earnings from the underlying businesses to continue.

Management expects to maintain a focus on balance sheet and cash flow optimisation, with capex for FY22 expected to be between $340m and $360m.

Orica share price over 12 months.