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The Orica Ltd (ASX:ORI) share price shoots higher even as net profit falls

Falling profits can’t keep this stock down. The Orica Ltd (ASX: ORI) share price has shot 6% higher to a two-month high of $17.66 in afternoon trade after the chemicals and explosives group posted a 16% drop in underlying net profit to $324.2 million.

Orica is the fourth-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index at the time of writing with the Galaxy Resources Limited (ASX: GXY) share price, the Orocobre Limited (ASX: ORE) and the Pilbara Minerals Ltd (ASX: PLS) share price taking the top three spots.

Investors are willing to overlook the full year profit transgression because the second half of FY18 showed a strong turnaround with earnings before interest and tax (EBIT) jumping 46% in the last six months of the financial year.

What’s more, management has lifted its final dividend payment by 12.5% to 31 cents a share (unfranked) and is promising more good times ahead.

“We are well placed to deliver improved earnings in 2019. Increased demand is expected to translate to earnings growth in each of our regional businesses, with the exception of Latin America,” said Orica’s chief executive, Alberto Calderon.

“Customer adoption of new technologies and conversion to more modern, less commoditised products and services is expected to continue, supporting our market share and margins”.

The performance in the second half stands in contrast to the first half of FY18 when technical problems at the group’s Burrup ammonium nitrate plant contributed to a disappointing interim result.

These issues have been resolved although a permanent fix to bring plant utilisation back to 100% won’t be completed until FY20.

Orica’s net profit was a little ahead of consensus expectations, but more importantly, analysts are tipping close to 20% earnings per share growth for the company in FY19. This puts the stock on a forecast price-earnings multiple of 17 times.

That’s not expensive, particularly as FY20 earnings will likely be boosted by the Burrup plant firing on all cylinders.

Having said that, I think there’s more medium-term upside from Nufarm Limited (ASX: NUF) as Nufarm’s share price has been oversold on the back of unfavourable weather.

Some brokers also believe that Incitec Pivot Ltd (ASX: IPL) is poised to deliver an earnings surprise when it hands in its full-year results on November 13.

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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