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Orica Ltd reports a lacklustre 2014: But will big changes turn the company around?

Chemicals and explosives manufacturer Orica Ltd (ASX: ORI) released no less than five separate announcements to the market this morning – they certainly can’t be said to have fallen short in their continuous disclosure obligations.

With a full-year investor presentation, full-year results ‘compendium’, preliminary final report, a ‘$602.5M NPAT’ summary and an announcement of the sale of Orica’s chemicals division, there’s a lot to wade through (and a lot of duplication).

As an aside, investors looking to break down the company’s performance sector by sector and in great depth should absolutely check out the results ‘compendium’ announcement, which is one of the most comprehensive I’ve ever seen and a great example of corporate transparency.

Here’s what you need to know about the other four announcements:

  • Revenue shrank 1.3% to $6,796.3m
  • EBITDA down 2% to $1,230.5m
  • NPAT rose 2% to $602.5m
  • Positive cash flow leapt 48% to a total of 460.5m. Combined with the sale of the chemicals division (see below), Orica will be cashed up in the new year
  • Dividends climbed 2% to 96 cents per share for the year (roughly 5% at today’s prices, 40% franked)
  • Gearing at 33.7%, down from 36.8%
  • The biggest revelation was the sale of Orica’s chemicals division to a group of funds for $750 million, on a price/EBIT ratio of around 11

Orica’s average year was due to weaker volumes across all product lines, with poor commodity prices, weaker demand and customer shutdowns affecting sales, although investors were shielded from the worst of it by a weaker AUD.

With ‘challenging’ business conditions expected to continue for the foreseeable future, management has announced a ‘headcount reduction’ of another 700 positions in 2015, and various efficiency drives that will lead to a reduction in costs of over $200 million by 2016.

Pre-tax implementation costs of $100-120 million will largely negate the savings of $140-170m expected in 2015, but the reduced costs will have a very favourable impact on the company’s earnings in the medium term; $200m is a staggering 33% (!) of this year’s $602m profit figure.

However that outcome will be affected by Orica’s divestment of its chemicals business for $750 million, approximately 11 times the $67.2 million in EBIT it contributed to the company this year.

Apparently strong third party interest lead management to believe that better value would be achieved for shareholders through a sale, rather than the previously favoured demerger.

Given that the chemicals division offers substantially lower margins than Orica’s other lines its sale is a sound decision and puts the company in a very strong financial position heading into FY15.

Analyst Morningstar has maintained a price target on Orica of $25 which, if accurate, makes the company look substantially undervalued.

The only real question remaining is whether the company will reinvest the sale funds, return them to shareholders, use them for acquisitions, or pay down debt.

Investors will also have to wait and see whether cost savings will be used to lower prices, or if margins will be maintained leading to higher profitability.

Either way, both of these decisions are good problems to have and shareholders in Orica Ltd should be in for a good 2015 and 2016.

With that said, it’s still not as good an investment as The Motley Fool‘s Top Stock for 2015, a company with outstanding competitive advantages and some real performance muscle.

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Motley Fool contributor Sean O'Neill doesn't own shares in Orica Ltd.

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