Orica Limited (ASX:ORI) is a truly global company with operations in 50 countries and customers in 100 countries.
Is this business easy to understand?
Consisting of three business units, Orica Limited 'Orica' has evolved to become one of the world's leading mining services companies. Its core strategy is to be the global leader in the provision of high service, critical consumables to the mining, construction and infrastructure markets, leveraged to long-term increases in production and development volumes.
Orica Mining Services (OMS) is the world's largest provider of commercial explosives, blasting systems and blast based services.
Minova is a leading manufacturer and supplier of chemical-based consumables, bolts, equipment, accessories and services for ground consolidation, roof support, ventilation and water control to the underground mining, tunneling and civil construction markets. With a strong focus on technical expertise and innovative customer solutions, Minova is the global leader in the ground stabilization business.
Orica Chemicals has a strong portfolio of manufacturing and distribution assets strategically located across Australia, New Zealand, Asia, Latin America and Africa which enables it to provide valuable supply chain capabilities for its customers. The group comprises of six businesses: Mining Chemicals, Chemicals Australia, Chemicals New Zealand, Chemicals Latin America, Bronson & Jacobs and Watercare.
Does this business have a sustainable competitive advantage?
Orica Mining Services is committed to innovation and technology which is driving differentiation in key market sectors including open cut and underground mining, quarry operations, civil construction and tunneling. With a truly global reach, the business operates in over 50 countries with customers in twice that number throughout Australia Pacific, Asia, Europe, the Middle East, Africa, the CIS, North America and Latin America.
Orica's strategic positioning within the mining sector has allowed the Company to maintain a strong position despite continued global economic uncertainty. The mining and processing segments of the commodities value chain on which Orica focuses are largely influenced by production volumes which tend to demonstrate low volatility, even at times of economic slow-down.
Orica focuses on four criteria which guide their business growth:
1. Market leadership - aiming to be a market leader in each of their businesses.
2. Investing further in the best performing businesses that have met financial performance targets and have earned the right to grow.
3. Acquisition - Orica pursue opportunities in related businesses aiming to leverage knowledge, expertise and achieve synergies.
4. Productivity improvement across the entire company.
What are the risks facing this business?
The recent risk to Orica's business is the apparent 'legacy issues' from past manufacturing practices that are being progressively improved. Addressing these issues is a big challenge for the company. The remediation work required at some sites costs the business time and money. It also can damage the perception of the business in the community. To this end, Orica have developed company-wide programs to improve their safety, health and environmental performance which seem to be improving overall despite the high profile case at the Kooragang plant near Newcastle, NSW recently.
The other risk to Orica's business is their acquisition strategy. The risk is that Orica may overpay for acquisitions because they want to 'achieve synergies'. Paying too much up front to receive a synergistic benefit in future can be costly.
Is it run by able and trustworthy management?
Orica took the decision in 2010 to demerge the Dulux Group from the business in order to focus on their core business strategy. This decision reaffirms management's commitment to maintain their leadership position in their three business units. Orica reported a manageable net debt to equity level of 36.3% for their annual results to September 2011.
Is it trading at a bargain price?
Orica is a little expensive at the moment. My estimate of their value will most likely change upon the company reporting their half yearly results in the coming weeks.
2011 Actual Valuation = $22.11
Today's Share Price = $26.80
2012 Forecast Valuation = $24.84
2013 Forecast Valuation = $27.57
2014 Forecast Valuation = $29.94
*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.
In summary, Orica is a profitable business with average cash flow, manageable debt and experienced management. It is currently slightly expensive based on my metrics. The business is trading closer to its 2013 forecast value so does not represent good value at the moment. I am looking forward to seeing the Orica's business evolve as they focus on their core strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.