Downgrading Orica Fair Value Estimate to AUD 13 per Share on Softer Outlook

We downgrade our fair value estimate by 40% to AUD 13 per share following a reassessment of the magnitude of headwinds facing the Australian explosives (ammonium-nitrate) industry and global explosives markets more generally. Oversupply, driven by capacity additions, at a time when the outlook for growth in demand for Australian coal and iron ore is muted, is central to the more subdued outlook. Adverse price resets on contracts are only just beginning to evidence and are a key driver of the downgrade. Orica says it expects fiscal 2015 earnings at AUD 415 to AUD 440 million, considerably below our forecasts and those of the market; and we downgrade to AUD 418 million, or AUD 1.24 per share. The company expects fiscal 2016 to be at a similar level, though we downgrade to a harsher AUD 406 million, or AUD 1.10 per share. Considerable headwinds are still to play out given the poor outlook for coal and iron ore.