Orica’s fiscal year result a pop rather than a bang

Orica’s FY13 guidance had forewarned of a weakening profit number as the explosives business came under pressure, particularly at its North American operations.

The final underlying net profit print of $601.6 million was a 7.5% decline year-on-year, however it was a beat on consensus expectations of $589.2 million. A final dividend of 55 cents was a three cent improvement on the first half; however was only in-line with expectations and not a significant driver of the share price.

On the earnings front, however, its core business in Australia and Asia jumped 20.2% in FY13 to $623 million. With Australasia making up almost two thirds of ORI’s earnings it will be a major factor in the medium-term sustainability of ORI as it reorientates its explosives business to reflect the lower growth phase in mining as a whole. What will also help in the short term is gearing; having dropped to 36.9% from 41.5% last year it will assist in maintaining profit in FY14.

However, the earnings from North America are a real concern down some 24% to $108 million. The word out of management is that this is set to continue as the demand for its core product declines across the continent.

The mining services business is expected to remind under pressure in the short term. However the fact margins growth was solid in FY13 and is expected to remain so will see ORI maintaining the status quo, with possible upsides if mining services return to 2010-2011 levels. The subdued guidance does give ORI the ability to surprise on the upside over the coming 12 months.

Technicals

Since providing a profit warning in July, ORI had been trading in a graduate upward channel over the past four months. However there is strong resistance around $21.34; it has touched this point three times and each time it has bounced off strongly. 

Last week the upward channel was clearly broken and looked to be heading back to $19. However, the results today has seen a solid pop in the stock, which is now back above $21. I see the $21.34 mark as a key pivot point; if the pop from the results jumps through this mark and holds, a level of $23.50 (the resistance seen in April and May) will be the next top. However if this holds and is not broken  I see ORI returning back to $20, which could see the upward channel broken again and a stock price of $19 come Christmas.  

Orica share price

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