Orica recently posted a first-half FY17 net profit that exceeded Ord Minnett’s estimate by 7.5%, while group earnings before interest and tax (EBIT) were 3.0% above our forecast but slightly below a year ago. Adjusting EBIT for contributions relating to business sales, however, meant EBIT declined 4.1% on a year ago and fell just short of our forecast.
The growth outlook for Orica looks challenged, in part due to expected pricing resets beyond FY17, and the impending earnings drag from the part loaded Burrup plant.
However, with business improvement initiatives set to continue and management suggesting that demand conditions have stabilised, in part due to miners reverting to more normal mine plans, we maintain our Hold recommendation on Orica and our $16.80 target price. Our preference in the chemicals sector remains Incitec Pivot (IPL, Buy).