Morningstar | The Outlook for No-Moat Orica Is Unchanged and our AUD 16.50 FVE Stands. See Updated Analyst Note from 24 Feb 2019
We make no change to our AUD 16.50 fair value estimate for no-moat Orica. There are no changes to long-term assumptions, nor to our AUD 418 million underlying fiscal 2019 earnings forecast. This anticipates continued ammonium nitrate, or AN, volume growth from Australia Pacific, with Bontang plant expansion due to stronger demand, and comes despite well publicised delays from the Burrup plant to first-half 2020. North American and EMEA volumes are still anticipated to grow into fiscal 2019 with further penetration of technology-based productivity solutions driving higher margins. Our fair value estimate equates to an unchanged fiscal 2023 EV/EBITDA of 6.7, a P/E of 11.9 and a dividend yield of 4.2%, all discounted at WACC. In nominal terms, the fiscal 2023 P/E and yield improve to 7.6 and 6.6%, respectively. We forecast an 8.4% five-year EBITDA CAGR, reflecting our expectations for improving margins on AN sales.We credit Orica growing revenue at 2% CAGR to AUD 6.0 billion by fiscal 2023, or 10% ahead of fiscal 2018 levels. We still assume a midcycle AN price of AUD 1,425 per tonne (2023 dollars), little changed from fiscal 2018, reflecting oil prices at Morningstar’s unchanged USD 60 per barrel long-term forecast and Henry Hub gas prices at USD 3.00 per mmBtu. But we anticipate strong EBITDA margin improvement to 22% from fiscal 2018’s 16.4%, anticipating scale benefits, cost-outs with restructuring, and mix shift. In the past five years, higher margin emulsion increased as a percentage of total AN tonnage to 62% in second-half fiscal 2018 from 54% in first-half fiscal 2013. Longer term, we think there will be further operational improvement and forecast EBITDA growth to AUD 1.3 billion by fiscal 2023, 50% above what we suspect was the AUD 885 million low in fiscal 2018.
Orica shares are down 15% from AUD 21 highs from just over a year ago, but at AUD 17.70 still trade marginally above our assessed fair value.
Orica is engaged in the manufacture and distribution of commercial blasting systems and various chemical products and services. Co.'s segment comprised of: Australia/Pacific and Indonesia, North America, Latin America, Europe, Africa and Asia, which is involved in the manufacture and supply of commercial explosives and blasting systems; Minova, which is involved in the manufacture and supply of bolts, accessories and chemicals for stabilisation and ventilation systems in underground mining and civil tunnelling works; and Global Support, which is involved in the corporate and support costs, operation of the Botany Groundwater Treatment Plant and non-operating assets.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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