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Could Orica Ltd spin off another business like DuluxGroup Limited?

Explosives and chemicals producer Orica Ltd (ASX: ORI) has been taking a long hard look at its business in light of the waning mining sector, from which over 90% of its revenues come from. It is the world-leader in mining explosives, and operates in over 50 countries. Its Australian/Pacific segment saw a rise in FY2013, but the other regions of North America and Europe, the Middle East and Africa contributed less EBIT.

In 2013 it began an external review of its non-mining chemicals segment. The chemicals business reported weak conditions in most industrial markets in Australia and New Zealand, with EBIT of $92 million in 2013 down about 8% from the prior corresponding period. There was lower demand for bulk chemicals and market competition has increased, making trading product sales lower in Australia. It is looking towards growth in 2014, especially in the second half due to growth in the Latin American construction industry and improved sales of industrial chemicals.

The company may be considering selling the chemicals business to concentrate on its core business of explosives, or it could be spun off. It previously spun off and floated DuluxGroup Limited (ASX: DLX) in 2010, which is now a $2 billion business by itself. The chemicals business may be worth up to $1 billion.

Dulux’s paint business has been lifted by the housing construction rise recently, and share prices have risen 29.8% to $5.40 over the past 12 months, so that demerger has been successful. A potential floating of the chemicals business may be different unless it can show a steady increase in revenue and earnings.

The chemicals business is under pressure because of decreased demand from heavy industry in Australia.  For example, Its competitor, Incitec Pivot Limited (ASX: IPL), which produces explosives and fertiliser, has seen a 37% drop in earnings from its Australian fertiliser business, brought on mostly by a stronger Aussie dollar and a fall in global fertiliser prices.

Foolish takeaway

Explosives and mining services follow the mining industry cycle and mining usually does best at the top of an economic boom when its products are in high demand and they can charge attractive prices. Now is the time to run the ruler over the best of the industry so that you can recognise when the downturn has ended and the next leg-up begins.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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