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Orica cautious despite swing to FY profit

AAP logoAAP 3/11/2016 Prashant Mehra

Mining explosives maker Orica has flagged a cautious outlook for the 2017 financial year despite swinging to a full-year profit on the back of sharp spending cuts and improving commodities prices.

The company posted a full-year profit of $343 million for the year to September 30, a turnaround from the $1.27 billion loss a year earlier that had followed a large asset writedown. Underlying earnings were lower at $908 million, from $978 million a year earlier.

The result is also a sharp improvement from the 33 per cent drop in profit that it had suffered during the first half of financial year, when commodities prices had slid to multi-year lows in January and February.

Orica - whose fortunes are closely tied to the embattled resources industry - has benefited somewhat from the partial bounceback in prices of key commodities like iron ore, oil and coal.

The company reported an improvement in margins across every business in the second half of the year, but chief executive Alberto Calderon still preferred to take a conservative view of the market.

"While there has clearly been some external optimism on the market conditions, we remain conservative and will continue to focus on controllable outcomes," he said.

"I would agree with most analysts that perhaps there is some exuberance in prices, and they will go back."

Despite the gains, market conditions continue to be challenging.

Orica expects a hit of $60 million in the current fiscal on account of resetting prices in 2015/16. It also expects input costs to increase between $50 million to $70 million on account of previously negotiated materials contracts.

This impact would, however, be offset through spending cuts and business improvement initiatives, the company said.

It managed higher than expected cuts of $76 million through business improvements in FY16. In addition, capital expenditure was slashed 40 per cent to $263 million.

For the current fiscal year, Orica has flagged higher capital expenditure of between $300 to $320 million.

The company, which replaced its progressive dividend policy with a new payout ratio dividend policy earlier this year, declared a final dividend of 29 cents a share, taking its full year payout to 49.5 cents.

"The result represents a solid, if unexciting result in challenging markets," RBC Capital Markets analyst Andrew Scott said in a note.

"Outlook appears to point to a flat year ahead, consistent with consensus expectations but may disappoint some given the improved coal pricing environments."

At 1130 AEDT, Orica shares were up $1.20, or 7.7 per cent, at $16.81 each.

ORICA SWINGS TO FY PROFIT

* Net profit $343m vs net loss of $1.267b

* Revenue down 10pct to $5.092b

* Partly franked final dividend down 26 cents to 29 cents

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