Orora Limited

Company Overview: Orora Limited (ASX: ORA) is a global manufacturer, distributor and visual communication solutions company that provides an extensive range of tailored packaging and visual communications solutions. The company’s solutions help its customers in establishing, maintaining and growing leading positions in their respective markets. The company offers end-to-end packaging solutions and complementary services, including global product sourcing, distribution, design, printing and warehouse optimisation. The company’s growth strategy has three core strategic pillars, namely Optimise & Grow, Enhance & Expand and Enter New Segments.

ORA Details

Focused on Organic Growth: Orora Limited (ASX: ORA) is a leading packaging solutions company that provides an extensive range of tailored packaging and visual communications solutions to its customers. As on 26 November 2020, the company’s market capitalisation stood at ~$2.61 billion. The company has a decent track record of manufacturing, distribution and visual design both in Australasia and North America. In Australasia, the company is committed to delivering GDP based revenue growth by virtue of operating within good market structures and by servicing the defensive end markets of food and beverage. In North America, the company expects to supplement GDP based industry revenue growth with market share gains and increased sales to existing customers. From 2016 to 2020, the company’s statutory NPAT reported a CAGR of 9.22%.

5-Year Financial Summary (Source: Company Report, Thomson Reuters)

Despite the ongoing COVID -19 pandemic, the company’s businesses in both Australasia and North America are continuously operating as they are recognised as essential services providers. Looking ahead, the company is focused on creating the digital step change in its distribution business and is targeting defensive markets in visual communications. In its Australasian Beverage business, ORA will continue to identify and implement cost reduction opportunities. Further, it will continue to invest in asset upgrades, new capacity, and innovation. In North America, the company’s efforts are focused on driving sales growth, margin improvement and cost efficiency.

FY20 Results Highlights: For the year ended 30 June 2020, the company reported total sales revenue of $3,566.2 million, up 5.2% on the previous year, assisted by movement in exchange rates. Further, the company reported underlying EBIT of $224.3 million, down by 14.3% on the previous year, primarily due to lower sales as the pandemic spread across the world. During the year, the company completed the sale of Australasian Fibre business to a wholly owned subsidiary of Nippon Paper Industries Co., Limited (Nippon) for an enterprise value of $1.72 billion.

Over the year, the company returned a total of $600 million to shareholders comprising a special dividend and cash return. In FY20, the company successfully completed construction of a new $35.0 million warehouse, rebuilt the G2 glass furnace and upgraded the second forming line at its state-of-the-art facility in Gawler, South Australia. As on 30 June 2020, the company had net debt of $292 million down from $996 million at 31 December 2019, primarily as a result of the net proceeds of the sale of the Australasian Fibre business.

FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 38.93% of the total shareholding. Perpetual Investment Management Limited and Nikko Asset Management Australia Limited hold the maximum interest in the company at 9.68% and 6.58%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company’s gross margin and net margin stood at 18.3% and 0.8%, respectively. The company’s current ratio stood at 1.29x in FY20, higher than 1.25x in FY19, demonstrating the company’s improved capability to pay its short-term obligations. The company’s debt to equity ratio stood at 0.66x in FY20.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Dividend History: The company has a track record of paying decent dividends to its shareholders. For FY20, the company has declared and paid a final ordinary dividend of 5.5 cents per share, unfranked, representing a total pay-out of ~78% of NPAT for the year, reflecting the strength of ORA’s balance sheet and confidence in the outlook of the continuing businesses. The company’s total dividend for FY20 stood at 12.0 cents per share. From 2016 to 2020, the company’s dividend grew at a CAGR of 6.01%.

Dividend Trend (Source: Company Reports)

FY21 Trading Update: Despite adverse product mix, the company’s EBIT during Q1F21 was in line with the first quarter of the prior year. In North America, both the Orora Packaging Solutions (OPS) and Orora Visual businesses have been trading steadily, supported by the comprehensive business improvement plans. Notably, EBIT across OPS and Orora Visual businesses are tracking ahead of the first quarter of last year.

On-Market Buyback Update: In September 2020, the company commenced an on-market buyback of up to 10% of issued share capital, representing ~96.5 million shares. The buyback is expected to cost approximately $230 million. The buyback reflects the strength of the company’s balance sheet, current liquidity position and strong cash generation capability of the Group’s businesses. As of 26 November 2020, the company has bought back ~3.26 million shares for a total consideration of ~$83.62 million.

Revised Business Strategy: During FY20, ORA completed a wide-ranging review of its activities globally and announced its revised business strategy which demonstrated the company’s commitment to growth, balanced with capital discipline, and prudent use of shareholder funds. The company’s refreshed business strategy has established three core strategic pillars, namely Optimise & Grow, Enhance & Expand and Enter New Segments. To execute its revised business strategy, the company is striving to generate top quartile Total Shareholder Return (TSR) performance for its shareholders.

Key Risks: The company is exposed to risks related to the changes in macro-economic conditions globally or in a single country, region, or market. The company is also exposed to the risks related to the availability of key components, raw materials, and energy supply. The company operates in highly competitive markets with varying barriers to entry, industry structures and competitor motivational patterns.

Outlook: Looking ahead, the company is emphasising on making improvements in its core businesses, increasing the focus on sustainability and innovation, and investing in initiatives that generate opportunity and value for customers and shareholders. The company is also focused on expanding the breadth and depth of its market leading Australasian Beverage business. ORA intends to leverage its core capabilities to target end-market segments with appealing growth and decent financial returns.

The company is expected to continue to generate strong cash flows from its core business operations. ORA is committed to provide enhanced returns to its shareholders with a revised payout ratio of 60- 80% of NPAT, franked to the greatest extent possible. Further, the company is focused on maintaining appropriate leverage on the balance sheet and will maintain its target leverage of 2.0 – 2.5 times EBITDA. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month

Stock Recommendation: The stock of ORA has provided a return of 22.22% in the past three months and is trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$2.536 and resistance level of ~$3.02. We have valued the stock using Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). For the purpose, we have taken peers like Pact Group Holdings Ltd (ASX: PGH), Amcor PLC (ASX: AMC), and Secos Group Ltd (ASX: SEC). Considering the company’s refreshed business strategy, its resilient performance in FY20 and Q1FY21, modest outlook, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of $2.740, down by 0.725% on 26 November 2020.

ORA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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