This is the latest COVID-19 struck ASX stock to be upgraded by UBS

There may not be as many bargains now that the S&P/ASX 200 Index (Index:^AXJO) bounced strongly, but there's still value to be found for those who cared to look.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There may not be as many bargains now that the S&P/ASX 200 Index (Index:^AXJO) bounced strongly from last month's low. But there are still select stocks that remain oversold from the COVID-19 market shakeup.

One such stock is Orica Ltd (ASX: ORI), according to UBS, which just upgraded the explosives maker to "buy" from "neutral".

The Orica share price tumbled by over 25% over the past two months and the broker believes too much bad news have been levied onto the stock.

Too much pessimism in the stock

Orica is the leading supplier of explosives to the mining industry, a sector that is holding on better than most during the coronavirus-triggered bear market.

"The current share price is trading slightly above our new downside scenario valuation of $16.36, which implies a c10% decline in AN [ammonia nitrate] volumes (FY19-21)," said UBS.

"This assumes an aggressive c.6mths of disruption to global mine production vs the 2-3 months that we are currently forecasting in our base case.

"A 10% decline would exceed the largest AN volume declines in the prior cycle of c6% (FY16), when commodity prices were less supportive vs current prices."

Bang for your buck

It seems unlikely that demand for AN would drop over the medium term given that mining activity, particularly among the bulk commodities, is forecast to remain reasonably strong during the post COVID-19 recovery phase.

For instance, the iron ore price is proving resilient and that bodes well for explosives demand as miners like Fortescue Metals Group Limited (ASX: FMG) and BHP Group Ltd (ASX: BHP) try to boost output to capitalise on the current operating environment.

Detractors would point to the shutdown of mines in some countries to curb the global pandemic and the delay in starting Orica's Burrup facility due to the cyclone.

But these headwinds are already accounted for in Orica's share price, according to UBS.

Attractively priced

The company also recently undertook a $517 million capital raising to fund the acquisition of Exsa in Peru, which is also in the broker's earnings estimates.

"The stock now trades at a FY21 P/E (UBSe) of 15x, vs the typical multiple of 18x where the stock has traded during similar phases of the commodity cycle," added UBS.

"Post the recent (pre COVID-19) equity raising, we believe Orica's balance sheet is in a strong position."

UBS' price target on Orica is $21.38 a share. This implies around a 30% upside for the stock if you included dividends.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

More on Cheap Shares

A group of market analysts sit and stand around their computers in an open-plan office environment. The central figures are deep in thought about Megaport's recent earnings release
Cheap Shares

2 ASX 300 shares highly recommended to buy: Experts

These businesses may be severely underrated by the market.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
Cheap Shares

I'm listening to Warren Buffett and buying cheap ASX shares

Attractively valued ASX shares are a great call right now, in my view.

Read more »

Dog with a shoe in its mouth.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors

These businesses could be too cheap to ignore.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
Cheap Shares

Why I think these 2 ASX 300 shares are steals

These ASX shares have a lot of potential, in my view.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

2 cheap ASX 200 shares that look too good to ignore today

Cheap shares are hard, but not impossible, to find right now.

Read more »

A cool dude looks back at the camera while ziplining above the treetops.
Cheap Shares

2 great ASX shares to buy in July: experts

These companies have a lot going for them. Here’s why.

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Cheap Shares

In an expensive market, 2 ASX 200 companies too cheap to ignore

These two businesses seem far too cheap for what could happen next.

Read more »

a man and a woman kneel in a boxing ring with exaggerated make-up injuries, posing in humorous stance with the woman leaning back on her knees and the man leaning against her bright pink boxing glove as he gasps for air.
Cheap Shares

Is it time to buy these 2 beaten-up ASX shares in 2025?

These ASX shares could be great buys right now.

Read more »