Orica reports $602 million profit; shares rally

Leading global explosives producer Orica (ASX: ORI) has reported a net profit after tax (NPAT) of $602 million for the financial year (FY) ending September 2013. The profit result, which was down on the underlying NPAT of $650 million in the prior period, was achieved on the back of a 3% increase in revenue to $6.9 billion.

On a per share basis, earnings per share (EPS) were 165 cents, down 7% on FY 2012. Shareholders will be pleased to note the board has declared a final dividend of 55 cents, which brings the full year dividend to 94 cents — a 2 cent increase on last year — and represents a 57.4% pay-out ratio.

Importantly, Orica provided guidance that: “Net profit after tax before individually material items in 2014 is expected to exceed 2013 however volatile market conditions add a greater degree of uncertainty.”

A view previously expressed by Orica’s CEO Ian Smith is that as resource prices pull back from boom highs, for low-cost producers such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) volume will become more important to maintain revenues in response to lower commodity prices.

Mr Smith believes this scenario can play to Orica’s advantage as it means that while there may be fewer products sold to the smaller and less-competitive high cost producers, the major miners will continue to ramp up production and look to maximise volumes and extraction from current mines in order to keep revenues up and capital expenditure to a minimum. This view suggests more explosives required by the major miners.

Competitor Incitec Pivot (ASX: IPL) which owns the Dyno Nobel business is due to report its full year results tomorrow. Given Orica’s share price spiked nearly 7% higher in early trade, Incitec’s shareholders will be hoping for a similarly positive outlook from its management.

Foolish takeaway

The profitability of many firms in the mining services sector have been hit hard and likewise the share prices of many firms are down substantially from their 52-week highs. Orica’s yearly high and low is $27.59 and $17.47 respectively. With the shares recently trading at $20.88, based on FY 2013 results Orica is trading on a price-to-earnings ratio of 12.65 and a dividend yield of 4.5%.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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