Company Overview: Orora Limited (ASX: ORA) is mainly involved in providing an extensive range of tailored packaging and visual communications solutions that helps businesses in establishing, maintaining and growing their positions in their respective markets. The company also offers 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
Disciplined Capital Management Strategy to Support Growth Story Ahead: Orora Limited (ASX: ORA) is a global manufacturer, distributor and visual communication solutions company that works closely with its customers to provide an extensive range of tailored packaging solutions and displays. As on 17 December 2020, the company’s market capitalisation stood at ~$2.48 billion. The company currently operates a streamlined portfolio of manufacturing, distribution and printing businesses. In order to become a leading sustainable packaging solutions provider, the company intends to leverage its core capabilities to target end-market segments with appealing growth and solid financial returns. ORA has a long track record of delivering innovative product and operating solutions to its customers. From 2016 to 2020, the company’s statutory NPAT grew at a CAGR of 9.22%. As at June 30, 2020, the group had a net debt of ~$292 Mn from the prior year where it was at ~$890 Mn, representing significantly reduction of ~67.2% on Y-o-Y basis.
Looking ahead, the company is focused on generating strong cash flows from its core business operations and is committed to expanding the breadth and depth of its beverage business. ORA intends to evaluate organic and inorganic initiatives to add new products and capabilities to improve its existing product portfolio customer base. For its North America business, the company is focused on generating further operating efficiencies and enhancing the customer value proposition through investment in digital capabilities. ORA is focused on providing enhanced returns to its shareholders with a revised payout ratio of 60- 80 percent of NPAT and is committed to maintaining its target leverage of 2.0 – 2.5 times EBITDA.
5-Year Financial Summary (Source: Company Report, Thomson Reuters)
FY20 Result Highlights: During FY20, ORA’s businesses demonstrated resilience performance against challenging market and economic conditions. The company’s total sales revenue grew by 5.2% to $3,566.2 million in FY20. Bottom line of the company for FY20, stood at $239.9 million, up from $161.2 million in FY19. Underlying EBIT for FY20 stood at $224.3 million, down by 14.3% on the previous year, mainly due to lower sales as the pandemic spread across the world; coupled with additional costs to address the impact on the company’s factories and distribution network. During FY20, ORA completed the sale of Australasian Fibre business for an enterprise value of $1.72 billion and returned $600 million to shareholders comprising a special dividend and cash return. Over the year, the company also 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. ORA ended FY20 with net debt of $292 million, significantly reduced from $996 million at 31 December 2019, representing significant reduction of ~70.7% from 1HFY20 to FY20. It was mainly supported by net proceeds of the sale of the Australasian Fibre business (Fibre), and disciplined capital management strategy.
FY20 Result Highlights (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 39.75%. Perpetual Investment Management Limited and Greencape Capital Pty. Ltd. hold the maximum interest in the company at 8.54% and 7.21%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: Gross margin and EBITDA margin for FY20 stood at 18.3% and 9.8%, respectively. For the same period, the current ratio stood at 1.29x in FY20, higher than 1.25x in FY19, demonstrating the company has improved its 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)
Track Record of Paying Dividend: The company has paid a final ordinary dividend of 5.5 cents per share, unfranked, representing a total annual dividend payout ratio of approximately 78.0% of Group earnings before significant items (including discontinued operations). This summarized the total dividend of 12.0 cents per share for FY20. The annual dividend yield of the company is about 4.66% on a five-year average basis (FY16-20). At CMP of $2.760, the company’s annual dividend yield stands at 5.12%, which is higher than the 5-year average dividend yield of ~4.66%. From 2016 to 2020, the company’s dividend grew at a CAGR of 6.01%. Looking ahead, the company intends to maintain a dividend payout ratio of 60—80%, franked to the extent possible.
Dividend Trend (Source: Company Reports)
On-Market Buyback Update: In September 2020, the company commenced an on-market buyback of up to 10% of issued share capital, reflecting the strength of the company’s balance sheet, current liquidity position and the decent cash generation capability of the Group’s businesses. As on 17 December 2020, the company announced that it has bought back ~38.9 million shares from the market with the total consideration paid was ~$100.39 million with the highest price paid on 11 November 2020 of $2.820 per share and the lowest price paid on 14 September 2020 of $2.285 per share.
FY21 Trading Update: The company recently stated that its EBIT during Q1F21 was in line the first quarter of the prior year, despite adverse product mix. In North America, both the OPS and Orora Visual businesses have been trading steadily, supported by the comprehensive business improvement plans.
Key Risks: ORA is exposed to the risks and uncertainties caused by the COVID-19 pandemic. The company is also exposed to the risks related to the availability of key components, raw materials, and energy supply. The company’s operations may also be impacted from circumstances such as natural disaster, cyber breaches, operational failure or industrial disruption. Moreover, the physical and non-physical impacts of climate change may affect ORA’s assets and productivity.
Outlook: Following the review of its strategy, ORA has adjusted to new ways of working and is now focused on driving positive operating and financial momentum across all geographies. The company’s refreshed business strategy has established three core strategic pillars, namely Optimise & Grow, Enhance & Expand and Enter New Segments. ORA intends to provide enhanced returns to its shareholders with a revised dividend payout ratio of 60- 80 percent of NPAT, franked to the extent possible.
ORA will continue to identify and implement cost reduction methods in its Australasian Beverage business and will keep investing in asset upgrades, new capacity, and innovation. The company is focused on creating the digital step change in its distribution business and is targeting defensive markets in visual communications. The company also plans to reinforce the Orora Visual customer base by targeting accounts in defensive markets. For its North American businesses, the company is focused on consolidating and delivering on the existing earnings improvement programs.
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 10.99% 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 ~$2.544 and resistance of ~$3.03. 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), etc. Considering the company’s resilient performance during FY20, modest outlook, upwardly revised payout ratio, current trading levels, track record of paying decent dividend and valuation, we give a “Buy” recommendation for the stock at the closing price of $2.760, up by 3.759% on 17 December 2020.
.png)
ORA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.