Company Overview: Orora Limited is a packaging company. The Company is principally engaged in providing a range of packaging solutions, including design and manufacture of packaging products, such as glass bottles, beverage cans, recycled paper, cartons and multi-wall paper bags. Its segments include Orora Australasia, Orora North America and Other. The Orora Australasia segment focuses on the manufacture of fiber and beverage packaging products within Australia and New Zealand. The products manufactured by this segment include glass bottles, wines closures, corrugated boxes, cartons and sacks, and the manufacture of recycled paper. The Orora North America segment is located in North America, and purchases, warehouses, sells and delivers a range of packaging and other related materials. The Orora North America segment also includes integrated corrugated sheet and box manufacturing and equipment sales capabilities; point of purchase retail display solutions, and other visual communication services. 


ORA Details
 

Decent Top-line Growth in FY19 Amidst Challenging Environment: Orora Limited (ASX: ORA) is primarily engaged in the business of innovative packaging solutions. As on September 5, 2019, the market capitalisation of Orora Limited stood at ~A$3.32 billion. The company has recently released its results for FY19 in which its sales revenue witnessed a rise of 12.1% and stood at $4,761.5 million while its EBIT rose by 3.7% and stood at $335.2 million. The company’s FY19 results primarily reflect earnings growth and increased dividends which might attract the attention of the market players and it is worth noting that the company is possessing robust cash flows and balance sheet, which might help the company to continue to pursue the growth opportunities. Additionally, ORA stated that safety is a priority and, with respect to which, it has been focusing towards continued rollout of the comprehensive risk profiling reviews and development of the improvement plans for each site. Its focus remains on ensuring the best practice tools and processes are available to all the members of the team. The company’s Managing Director and CEO named Nigel Garrard reflected favourable views with regards to FY19 results and stated that the company had delivered another year of the earnings growth and underlying NPAT, EBIT and EPS were all higher even though there were challenging economic and market conditions, particularly in North America. Besides this, the company has earlier made an announcement that it would be recognising a Significant Item (or SI) after tax expense amounting to $55.8 million in its statutory financial results for the year ended June 30, 2019. Resultantly, statutory NPAT for FY19 stood at $161.2 Mn, which is down from FY18 statutory NPAT of $212.2 Mn. It was also mentioned that the positive result underlines the value of ORA’s portfolio of businesses, serving established market segments and spread throughout geographies in Australasia and North America, with solid profit growth in Australasia helped in offsetting the lower earnings from North America. The company has declared the final ordinary dividend amounting to 6.5 cps, which is 30% franked and is 70% sourced from conduit foreign income account. This amount reflects a rise of 4.0% on the prior corresponding period. It was also mentioned that the full-year dividend reflects a pay-out ratio of around 72%. The ex-dividend date happens to be September 16, 2019, and the record date is September 17, 2019, while the payment date stands at October 21, 2019. At CMP of $2.730, the stock of the company is trading at P/E multiple 15.25x of FY20E EPS. The company has a healthy balance sheet position, which might help it in making deployments towards the key strategic initiatives. Given the global drive against plastics, ORA's focus on alternate materials (glass, aluminium, etc) positions it to benefit within the packaging landscape.

Key Financial Metrics (Source: Company Reports, Thomson Reuters), *NA: Not Applicable

Top 10 Shareholders: The following picture provides the broad idea of the top 10 shareholders of Orora Limited:


Top 10 Shareholders (Source: Thomson Reuters)

Decent Key Margins: The company is possessing decent levels in its key margins as it posted net margins of 3.4% in FY19 and its EBITDA margin stood at 8.8% during the same time period. The company has a current ratio of 1.25x in FY19, which is higher than the FY18 figure of 1.20x and, thus, it can be said that ORA is in a decent position to meet its short-term obligations. Also, respectable levels of liquidity provide the company with sufficient headroom to make deployments towards key strategic business activities.

The company stated that its net debt as at 30 June 2019 amounted to $890 million which is up from $872 million as at December 31, 2018, and up from $667 million as at June 2018, mainly because of the recent growth investments as well as the impact of FX. Debt to equity stood at 0.58x in FY19.


Key Metrics (Source: Thomson Reuters)

Overview of ORA’s Operational Performance: In FY19, Orora Australasia posted EBIT stood at $246.6 million, displaying a rise of 6.2% on a pcp basis. The sales revenue was 2.1% higher, and the figure stood at $2,150 million. The earnings were higher throughout both the Australasian business groups (i.e., Fibre and Beverage) even though there were higher input costs and flat market conditions. The earnings growth in the Beverage business was because of the higher Can volumes, favourable product mix, and improvement with regards to the operating efficiencies.


Key Numbers (Source: Company Reports)

Orora North America EBIT witnessed a fall of 3.6%, and the figure stood at $116.6 million as compared to the prior corresponding period. The sales revenue was 21.9% higher, and figure amounted to $2,611.5 million, primarily because of the early contributions from the Bronco and Pollock acquisitions and the effects of the weaker AUD.

ORA Possesses Robust Balance Sheet: The company has a robust balance sheet which enables the further growth investment, and this might help the company in gaining traction among the market players. Additionally, the company stated that it is committed to sensible debt levels and investment-grade credit metrics. The following picture provides a broader overview of the company’s balance sheet position:


Balance Sheet (Source: Company Reports)

The company is having significant capacity and headroom with respect to facilities and covenants, and it is also maintaining the disciplined approach towards expenditure and acquisitions. There are expectations that, with the help of robust balance sheet position, the company would be able to make deployments towards the core business activities which could help it in achieving long-term growth.

Announcement About Appointment of Non-Executive Director: The Chairman of Orora Limited named Mr Chris Roberts has recently made an announcement about the appointment of Mr Thomas Gorman as the Non-Executive Director, effective from September 2, 2019. In the release, it was also mentioned that Mr Gorman brings a wealth of experience to the company, following the 30-year career in the executive positions at Ford Motor Company and Brambles Limited, of which he was Chief Executive Officer.

Understanding the Trend in Shareholder Distributions: With respect to capital management, Orora Limited stated that the capital is defined as the combination of the shareholders’ equity, reserves and net debt. The key objective of the company when it comes to managing the capital is to safeguard the ability to continue as a going concern, so that it can continue to provide the returns for the shareholders and benefits for other stakeholders, and maintain an optimal capital and funding structure. The final ordinary dividend happens to be 6.5 cps, which is 30% franked and 70% sourced from conduit foreign income account. The full-year dividend reflects the pay-out ratio of around 72%. Over the last six years, the company has consistently distributed dividends with decent payout ratios in the range of 60% - 70%. The annual dividend yield of the company is around 3.77% on a six-year average basis (FY14-19). At CMP of $2.730, the annual dividend yield of the company stands at 4.73%. The following picture provides an idea of the shareholder distributions:


Shareholder Distributions – Cents Per Share (Source: Company Reports)

What to Expect from ORA Moving Forward: In order to help offset the challenging market conditions and cost headwinds, for FY20, the company would continue to invest on efficiency, growth and innovation, as well as integrate the recent acquisitions. The company also stated that, to optimise the capital structure, it may adjust the amount of the ordinary dividends paid to shareholders, maintain the dividend investment plan, raise or return the capital to shareholders and repay the debt or raise debt for working capital as well as capex requirements, or to facilitate the acquisitions in line with strategic objectives and operating plans.

With respect to North America, the company has stated that, in response to tough market conditions, the company’s management has already implemented numerous initiatives which are aimed at improving the processes, efficiencies and taking the costs out of business. It was also stated that the earnings improvement program has been helped with the further dedicated external resources. While the initiatives progressively gained traction in FY19, most of the benefits are anticipated to impact in FY20. The corporate costs stood at $28.0 million, which were slightly lower than the underlying costs in pcp, which amounted to $29.9 million. Additionally, the company stated that the corporate costs are being well managed and these costs in FY20 are anticipated to be broadly in line with the underlying costs in FY19.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: PE- based Valuation

 PE- based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months


Historical PE Band (Source: Thomson Reuters)

Stock Recommendation: The stock of Orora Limited has witnessed the fall of 15.15% in the span of previous one month (partly, given the latest blow to the net profit) while, in the time frame of past three months, the stock has fallen by 11.39%. As per ASX, the stock price of ORA has been trading towards its 52-week lower levels of $2.600 with PE multiple of 20.52x, proffering a decent opportunity for accumulation. The company has recently advised that the 2019 AGM would be conducted on October 15, 2019. The company stated that around 50% of the restructuring initiative relates to Australasia. The return of around 30% is anticipated in FY20. The Orora Global Innovation Initiative will continue to be accessed by Australasian business in order to enhance the value proposition and/or improve the productivity and drive the growth in earnings. Based on the foregoing, we have valued the stock using a relative valuation method, P/E multiple and have arrived at a target price upside of high single-digit (in percentage term)). Hence, considering the above-mentioned factors, we give a “Buy” recommendation on the stock at the current market price of A$2.730 per share (down 0.727% on 5 September 2019). 
 

 
ORA Daily Technical Chart (Source: Thomson Reuters)

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