Hi AllI have been buying ORI on the dips into the $21-22...

Hi All

I have been buying ORI on the dips into the $21-22 range.
Below are some thoughts on the debt position of Orica, which is a timely review considering the debt crisis and the effect on bond markets.

Its not that long ago that some analysts were complaining that Orica could be picked off by a private equity fund because the balance sheet looked lazy. The argument being that by buying the company and raising the level of debt used in the business a Private equity player could substantially increase the ROE.

These days I am becoming more agnostic to any level of borrowings above say 30% debt to equity. Though I still do feel that the level of borrowings needs to also be looked at in relation to the cashflow of the business and also the length of maturity of the debt.

Looking at ORI, firstly I think the comsec data is wrong. I have ORI's net debt to equity ratio at 36%. At 30 Sept. they had NIBD of 1408.1m ( 76.5+1678.5-346.9) and equity of 3875.6m.

Considering the companies ability to service this debt I think the best way is to look at Net Receipts(Money received from customers minus money paid to employees/suppliers) then minus out the tax paid, and divde the total by the net interest. This gives a key metric of how many times over the company can service its interest after paying all other first order priorities (employees, suppliers, tax).

FY2011

Net Receipts 1076.3m - Tax Paid 229.7m / Net Interest 143.8= 5.8 x.

Anything over 4x is solid IMO. The metric for 2010 was very similar so I consider the level of debt easily servicebale for ORI in terms of cashflow.

The next point to consider is the maturity of the debt (as essentially we are talking about a global environment where credit markets could freeze).

Reading through note 17, in the Annual report the majority of the debt(1443.4m) is through private bond placements in the US debt market, that have maturities ranging from 2012-2030. The most recent placement was in August 2010 with $600m USD raised in 10-20 year bonds at a weighted average price of 4.82%. So not only does ORI have very spread out debt maturity but they are also borrowing at very competitive rates.

The final point to make is that only 76.5m debt was listed as a Current Liability in the FY11 financial statements which again shows that they will have no need to raise new debt or visit the bond markets in the next year which is potentially when the markets will be most turbulent with the Italian saga in full swing.

ORI has also completed their two major CAPEX projects on time and under budget. The AN plant in Bontang (500m CAPEX) and the detanator facility in Nanling are both nearing production, and will start to contribute to the groups earnings. These two projects along with the uprate at Kooragang Island and the Sodium cynide plant at Yarwun, have been a substantial investment for the future.