Explosives maker Orica Ltd (ASX: ORI) is the worst performer on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) after the stock crashed to a six-and-a-half-year low following a profit warning.
The stock slumped 15.6% to $15.90 in late morning trade as weak demand for its goods and services along with the oversupplied ammonium nitrate market has forced management to flag that net profit for the year ending September 30, 2015, will be 10% to 15% short of the average consensus forecast.
Ignoring outliers, the mean 2014-15 net profit estimates of analysts is $490 million but that is not all the bad news shareholders have to contend with.
Orica's new chief executive Alberto Calderon is giving the company a "royal bath" – whereby a new head clears the deck to rebase the business.
This process prompted Orica to recognise an after tax non-cash impairment charge of between $1.35 billion and $1.65 billion for the current financial year with the bulk of the writedown associated with the separation of its ground support business into a standalone division.
Further, there are no sacred cows as Calderon undertakes a sweeping review of the business. This includes Orica's ongoing share buyback that was announced in March this year and its progressive dividend policy.
This essentially means a likely cut to dividends that could be greater in magnitude than the 4% reduction in distribution that most analysts are anticipating for 2014-15.
Brokers are tipping dividends will rebound in the following year to the 2013-14 level of 96 cents per share, but this assumption must now be thrown into doubt as well.
Management's downgrade is based on Orica delivering explosives volumes of around 3.75 million tonnes, a 7% increase in sodium cyanide volumes for 2014-15, lower prices for its products, and a range of one-off charges valued at $40 million.
However, Orica's bottom line will benefit from its ongoing transformation program, which is delivering greater savings than the target of $140 million to $170 million for 2014-15.
Pity that isn't enough to save shareholders a lot of pain and the bad earnings news was enough to drag its peer Incitec Pivot Ltd (ASX: IPL) down 5% to $3.41.
I think investors should avoid the sector even though the sell-off makes these stocks look seemingly good value because there's probably more downside risk to Orica. One also has to wonder if Incitec Pivot will be announcing an impairment charge to its ammonium nitrate plant.
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