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Why the Orica share price is outperforming the ASX 200 today

The Orica Ltd (ASX: ORI) share price is defying the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) sell-off as its shares got a boost from UBS.

The Orica share price jumped 0.8% to a two-week high of $17.40 in the last hour of trade when the ASX 200 index tumbled 0.9% due to ongoing worries about a sharp global slowdown.

There aren’t many shares trading in the black today although beaten down names like the TPG Telecom Ltd (ASX: TPM) share price and CSR Limited (ASX: CSR) share price are enjoying a relief rally.

But it’s chemical and explosives maker Orica that UBS is tipping for a sustained bounce-back in 2019 as the broker slapped a “buy” recommendation on the stock.

“The mining market is recovering from a commodities downturn and production activity is normalising. As such, we forecast growth in global explosives demand,” said UBS.

“However, global AN [ammonia nitrate] markets are over-supplied, limiting near term price growth and restricting Orica’s leverage to the cyclical recovery. We see these issues fully discounted by the market and initiate at ‘Buy’.”

The oversupply of AN is one of the key reasons why the ORI share price has fallen over 4% this calendar year. The loss was worse but the stock has managed to find a floor in October as experts believe the worst may be over.

While the oversupply of AN is likely to persist for a few years even with the 5% compound annual growth rate (CAGR) in demand that UBS is expecting, the broker thinks the AN price has bottomed.

“Orica is now through the bulk of its supply re-contracting meaning recent re-pricing headwinds are likely to shift to modest tail winds over the next few years as contracts are re-priced into a more balanced global AN supply market,” said UBS.

Further, the broker believes Orica is a leader in blasting technologies and mining customers are increasingly looking for ways to boost productivity in their operations.

Orica also has the balance sheet strength to make bolt-on acquisitions with UBS estimating that it could swallow an $800 million takeover target.

UBS has an $18.86 price target on Orica and is forecasting a dividend yield of 2.9% for FY19.

Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited. The Motley Fool Australia has recommended TPG Telecom Limited. 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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