Morningstar | We Temper our Fiscal 2019 Earnings Forecast for No-Moat Orica. No Change to AUD 16.50 FVE.
We make no change to our AUD 16.50 fair value estimate for no-moat Orica. However, we have reined-in our fiscal 2019 EPS forecast to AUD 1.11 from AUD 1.37 previously. We now expect full recovery from fiscal 2018's maintenance and weather-impacted lows to take slightly longer than previously allowed for. Orica's difficulties have not just been maintenance and weather one-offs. The company has reported reduced underlying EPS in each of the last seven fiscal years to 2017, and the first half of fiscal 2018 didn't set a different tone with underlying EPS to March down 47% to AUD 0.33. Earnings sit at around one third levels enjoyed at fiscal 2010's AUD 2.35 per share peaks. But we hold to our view for partial recovery, our underlying EPS forecast for fiscal 2018 little changed at AUD 0.86, down 17% due to the weak first half, partially offset by the second half, expected to be up strongly to AUD 0.53. Orica anticipates a significantly stronger second half with ammonium nitrate, or AN, volumes forecast to increase by 10% from the first half, taking the full year to 3.65 million tonnes. Firmer AN pricing and improved manufacturing reliability are expected to assist.Longer term, we think there will be operational improvement and still forecast high single-digit five-year cumulative annual EBITDA growth to near AUD 1.3 billion by fiscal 2022, 50% above AUD 855 million expectations for fiscal 2018's nadir. Orica has made changes to the manufacturing team and is anticipating better performance. But we now assume extra caution on the pace of the turnaround, hence our softer fiscal 2019 forecast.
Our fair value estimate equates to a fiscal 2022 EV/EBITDA of 6.8, a dividend yield of 4.2% and price/earnings of 11.8, all discounted at WACC. Our fiscal 2022 EPS forecast is AUD 1.83. At around AUD 17.20, shares still screen as marginally overvalued with the multiples elevated and the yield unenticing.
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.
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