Featuring Simon Conn & Daniel Moore
IML portfolio managers Simon Conn and Daniel Moore discuss why they think Orica is well positioned right now including its strong growth prospects, increasingly rational industry, enhanced product range and reasonable valuation.
Simon: So, Daniel, thanks for joining us today to talk about Orica. It’s a stock I know you’ve covered for a long time, but why do you think it’s so well positioned in the current market?
Daniel: Yeah, thanks, Simon. I think the explosives industry is really emerging from quite a really tough few years, where the explosives prices, or AN prices, have been quite depressed and now we’re seeing a good recovery – demand’s coming back post the mining restrictions of COVID, and we’re seeing that demand supply equation much more balanced and we’re seeing higher AN prices, and improving returns to the whole industry, which is great. And then, if we look forward, what’s sort of exciting for the whole industry is they’re much more rational today.
Nobody’s looking to build new explosive plants despite the higher prices And that’s because for a few reasons. 1. To build a new plant costs a lot more today. 2. The environmental provision, the environmental permits are much harder to get today as well. And 3. I think the industry is just a bit more rational, they’re more focused on returns rather than market share today. So, that’s all leading quite a good medium term outlook for the business.
Simon: And so what makes Orica different to its peers?
Daniel: Yeah. So, Orica is the number 1 global leader. So, they’ve got operations in every country almost, all the major countries around the world. And because of that, they’ve got really good scale. And with that scale, they can out-invest their competitors. So, they invest heavily in R & D (research & development) and in product development. And because of that, they’ve got some really exciting, products to bring to market in the technology space. Wireless blasting is going to really change how miners use their mine plans to get the ore out of the ground. They’ve got some really good software products and they’ve got some great monitoring systems as well. So, a whole range of products that competitors don’t have, some really good IP. And then, also we think the management team’s fantastic. We really think they’re industry-leading, as well as the board.
Simon: Yep. True.
Daniel: And then to top it all off, they own some land, they own a lot of industrial land, several hundred million, they’re going to look to sell over time, and they’ve got a great balance sheet. So, lots to like.
Simon: Right. Okay. I think the one thing about Orica has always been it’s a play on volume, not price.
Simon: And with the current mining environment, a lot of the customers like BHP and Rio are looking to try and save costs, which I think puts Orica in a really special position, to help customers save costs. In terms of the valuation, Daniel, obviously, it’s got to be about the numbers. How does the valuation stack up for Orica?
Daniel: Yeah. No. The valuation’s good. It’s very attractive. It’s trading on around 18 times forward earnings right now today, which is reasonable. But what we’re probably most excited about is the earnings growth, they’re going get over the next 3 to 4 years as they renew some of those older low price annual contracts to where spot prices are today. So, we see some really good double digit earnings growth in the next 2, 3, 4 years, and that multiple is going to come down considerably. And when you add in the really strong balance sheet, they’re a global leader. We think that’s a really attractive valuation.
Simon: Yeah. Which all makes Orica a very attractive stock to own and why we added it across our large-cap funds, but also it’s a top 10 holding among our mid-cap fund, Future Leaders, and a top 10 holding in the QVE listed investment company. And a stock we’ve covered for a long time. I think really well positioned in the current environment. Thanks, Daniel.
Daniel: Thank you.
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