2 turnaround stocks shaping up for a substantially better FY2015

After pretty average reports in the past financial year, Orica Ltd (ASX:ORI) and Mermaid Marine Australia Limited (ASX:MRM) look like they could be set for a powerful rebound, and here's why.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As everyone who's ever owned shares knows, the share-market can be a fickle lover.

Long-term investments are sold every day on short-term news, and the best investors take advantage of bad news to add to their holdings.

The two companies in today's article have been unfairly hammered over the past twelve months, and look likely to see a strong recovery in their share price over the next twelve months.

Orica Ltd (ASX: ORI) – last traded at $18.47, down 23.3% in the past year, yields 4.8%

Orica fell heavily on the release of its full year report yesterday, with investors apparently disappointed with lower revenues, despite a 2% higher NPAT and dividend payouts.

The result was a lot better than it could have been, with a weak Australian dollar protecting shareholders from the full impact of challenging business conditions.

Management also announced that Orica has entered into an agreement to sell its low-margin chemicals division for $750 million, roughly 11 times its EBIT figure.

In addition to this, cost saving initiatives (including job losses) are expected to deliver savings of over $200 million per annum by FY2016. Given that $200 million is approximately 33% of the company's earnings, it's not hard to see significant potential for improvement.

After the sale (expected to close in January), Orica will have close to $1 billion in cash and ample opportunity to pay down debt or grow acquisitively.

An upsurge in mining activity in Australia is also expected to deliver moderate earnings growth over the medium term.

I think the market's got this one wrong, and Orica looks like a strong medium-term purchase at today's prices.

Mermaid Marine Australia Limited (ASX: MRM) – last traded at $1.63, down 49%, yields 7%

Mermaid Marine has had a bumpy ride over the past twelve months, with the company falling from highs of $3, to lows of $2, before recovering to $2.50 and plummeting recently to its current price of $1.63.

The causes are plentiful, with mining (drilling, in this case) services companies falling out of favour, combined with an apparent overvaluation of MRM, lower oil prices, and an earnings-dilutive acquisition of Jaya.

The most recent plunge appears to be due to falling oil prices, but in this case the market has clearly put the cart three miles in front of the horse and is wondering why the horse can't pull.

Lower oil prices will not translate into lower earnings or even fewer contracts for Mermaid unless they persist much longer than they have; investors need to look at all the capacity expansion still occurring in the iron ore industry to see just how long it takes for weaker prices to subdue activity.

Besides, many of Mermaid's projects are in South-East Asia. An area that should enjoy significantly lower costs than projects in richer nations like Australia. This reduces the likelihood of these contracts being cancelled or postponed.

Additionally Mermaid has not experienced a full year of earnings from Jaya yet and this should add meaningfully to earnings per share figures this year.

The cherry on top is the fact that last year's earnings of 18 cents per share leaves a significant margin over the paid dividends of 12.5 cents a share, making it highly likely that Mermaid Marine's dividend will continue this year and beyond.

Yielding 7% per share with a high likelihood of price recovery and short-term earnings growth, it's an opportunity that could deliver you great returns over the next twelve months.

Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »