In text book fashion, new Orica Ltd (ASX: ORI) CEO Alberto Calderon took an immediate $1.7bn asset write down on joining the group in late 2015.
He then spent 2016 restructuring the business, generating future savings of $100m p.a. He is now about to reap the benefits from an improving mining cycle.
The scale of the recovery opportunity is there to see. If we look back to 2012, Orica generated sales of $6.8 billion and $1.76 of earnings per share. Five years on, group sales are running at only $5 billion and analysts are forecasting just $1.10 EPS to December 2017.
Calderon reported at the half year that mining plans were finally starting to normalise and there was a return to more sustainable strip ratios by the customer base. With that in mind, there are good grounds to believe that consensus forecasts for Orica of $5.4 billion by 2019 could seriously understate future volume and margin recovery. Any weakening of the AUD to the USD would further add to this.
Even as forecasts stand, Orica trades on a current year EV:EBITDA multiple of 9x. This doesn't appear unduly demanding for a world leading business at the low point in its cycle.
One final word regarding the dividend. The shares currently yield 2.8%. Orica's stated policy is to pay out 40%-70% of its profits as dividends through the cycle. The current ratio is at the bottom of this range, meaning that future profit growth should be reflected in even higher dividend growth.
Foolish takeaway
The author believes that the Mining Services sector is a good place to be at present, with the strength and duration of future recovery likely to surprise on the upside. Orica is a great international play on that recovery.
