Here’s why the Orica (ASX:ORI) share price is sinking 6% today

The Orica Ltd (ASX:ORI) share price is on the move on Thursday following the release of its half year results this morning…

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The Orica Ltd (ASX: ORI) share price is on the move on Thursday morning.

At the time of writing, the industrial chemicals and commercial explosives company’s shares are down 6% to $12.62.

Why is the Orica share price sinking?

Investors have been selling the company’s shares following the release of its half year results this morning.

According to the release, for the six months ended 31 March, Orica recorded a 9% decline in revenue to $2,623.2 million. This was driven by lower ammonium nitrate volumes due to COVID-19 and geopolitical issues and unfavourable foreign exchange (FX) movements.

Unfortunately, things were much worse for its earnings, which may explain why the Orica share price is tumbling today.

Orica reported earnings before interest, tax, depreciation and amortisation (EBITDA) of $362 million for the period. This was down 25% on the prior corresponding period.

Management advised that the decline was largely from lower volumes in high margin markets, the non-repeat of carbon credits in Canada, and adverse FX movements. Though, further impacting the company’s EBITDA result were incremental SAP costs and arbitration costs in relation to the Burrup plant rectification works.

And on the bottom line, net profit after tax before significant items fell 56% to $73.4 million.

In light of its profit decline, the Orica board elected to declare an unfranked interim dividend of 7.5 cents per share. This is down from 16.5 cents per share a year earlier but within its target payout ratio at 42%.

Orica’s Managing Director and CEO, Sanjeev Gandhi, commented: “Our first half financial results are in line with our February market update and reflect the impact of various market factors. As we detailed in the update, ongoing COVID-19 disruptions, geopolitical issues and unfavourable foreign exchange movements impacted us in the half.”

“As we address these challenges, we have maintained our disciplined approach to our balance sheet and capital management, while delivering a step up in cash generation and controlling our levels of debt and gearing.”

“Operationally, we continued to focus on what we can control, making good progress on many core strategic fronts, including growing uptake of our high margin digital solutions, the successful integration of Exsa, Burrup operating in line with our plans and further stabilisation of our SAP platform.”

Outlook

Mr Gandhi appears cautiously optimistic that the second half will be better.

He said: “While the factors that impacted us in the first half are expected to largely reverse over time, and the fundamentals of our business remain sound, we remain cautious about the short-term outlook.”

“It has been encouraging to see volumes start to increase at the end of the half. While we expect a better second half than the first, given uncertainties remain around market factors, we expect the second half EBIT to be lower than the pcp,” he concluded.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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