Company Overview: Orora Limited (ASX: ORA) is a global manufacturer, distributor and visual communication solutions company that offers end-to-end packaging solutions and complementary services, including global product sourcing, distribution, design, printing and warehouse optimisation. The company closely work with its customers to provide an extensive range of tailored packaging solutions and displays. It also offers complementary services, including global product sourcing, distribution, design, printing and warehouse optimisation. The company’s vision is to be the industry-leading packaging solutions and displays company.
ORA Details
Focused on Expanding Businesses and Entering New Markets: 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. ORA operates a streamlined portfolio of manufacturing, distribution and printing businesses. As on 21 January 2021, the company’s market capitalisation stood at ~$2.33 billion. The company has a decent track record of delivering innovative product and operating solutions to its customers. Following the completion of a wide-ranging review of the company’s activities, ORA has recently introduced a revised business strategy that has three core strategic pillars, namely (a) Optimise & Grow, (b) Enhance & Expand and, (c) Enter New Segments. These three pillars will support the strategic activity within the business, enabling ORA to capitalise on growth opportunities as they emerge. From 2016 to 2020, statutory NPAT grew at a CAGR of 9.22%.
5-Year Financial Summary (Source: Company Report, Thomson Reuters)
Looking ahead, the company is focused on identifying opportunities to expand its Beverage footprint into adjacent or complementary end markets. Moreover, ORA will continue to identify and implement cost reduction opportunities for its Australasian Beverage business. The company is also focused on creating the digital step-change in its distribution business and is targeting defensive markets in visual communications. Overall, the company is expected to generate decent cash flows from the core business operations.
Decent Performance in FY20: 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, despite the challenging market and economic conditions. 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. Statutory NPAT for the year stood at $239.9 million, up from $161.2 million in FY19. One of the major highlights of FY20 was the completion of 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. During the year, the company also 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.
In FY20, ORA returned a total of $600 million to shareholders comprising a special dividend and cash return. ORA ended FY20 with net debt of $292 million, significantly reduced from $890 million as at 30 June 2019, primarily as a result of the net proceeds of the sale of the Australasian Fibre business.
FY20 Results Highlights (Source: Company Reports)
Key Metrics: Gross margin and net margin for FY20 stood at 18.3% and 0.8%, respectively. Current ratio for FY20 stood at 1.29x, higher than 1.25x in FY19, demonstrating the company’s improved capability to pay its short-term obligations. Debt to equity multiple stood at 0.66x in FY20.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 40.21%. Perpetual Investment Management Limited and Greencape Capital Pty. Ltd. hold the maximum interest in the company at 8.66% and 7.21%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Dividend History: The company has a decent track record of paying dividends to its shareholders. From 2016 to 2020, dividend per share grew at a CAGR of 6.01%. For FY20, the company paid a final dividend of 5.5 cents per share, unfranked, representing a dividend payout of ~78% of Group NPAT. This took the total FY20 dividend to 12.0 cents per share. The annual dividend yield of the company is around ~4.66% on a 5-year average basis (FY16-FY20). At CMP of $2.550, the company’s annual dividend yield stands at 5.38%, which is higher than the five-year average dividend yield of ~4.66%. Looking ahead, the company intends to maintain a dividend payout ratio of 60—80%, franked to the extent possible, which might attract the attention of dividend seeking investors.
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, represents approximately 96.5 million shares. As on 4 January 2021, the company announced that it has bought back ~42.93 million shares from the market at a total consideration of ~$111.44 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.
Update on Vesting and Lapse of Options and Rights: On 7 January 2021, the company announced that in accordance with its Short-Term Incentive Plan, Long Term Incentive Plan and Long-Term Incentive Rights Plan, wherein it has cancelled 419,350 Unlisted Rights at nil exercise price, 116,375 Unlisted Options at $2.86 exercise price, and 121,500 Unlisted Options at $3.58 exercise price. Further, the company has vested 49,531 Unlisted Rights at nil exercise price. As a result, the company’s capital structure now has 922,702,322 shares, 5,668,154 Unlisted Rights at nil exercise price and 5,094,753 Unlisted Options.
Trading Update: Despite adverse product mix, the company’s EBIT during Q1FY21 was in line the first quarter of the prior year. In North America, both the 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.
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: ORA’s revised strategy reflects its commitment to growth, balanced capital discipline, and prudent use of shareholder funds. As per the revised Shareholder Value Blueprint, the company’s goal is to generate top quartile total shareholder returns. Looking ahead, ORA is focused on expanding the breadth and depth of its market-leading Australasian Beverage business. In North America, the company’s efforts are focused on driving sales growth, margin improvement and cost efficiency.
In the near-term, the company’s underlying growth is expected to be broadly in-line with the gross domestic product, underpinned by enhancements to business models, further innovation, and operational investments. The company intends to deliver enhanced returns to shareholders with a revised payout ratio of 60- 80 percent of NPAT, franked to the greatest extent possible. Further, the company is committed to maintaining 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 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 corrected by 5.90% in the past one month and is currently trading lower than the average 52-weeks price level band of $2.190- $4.062, offering a decent opportunity for accumulation. On the technical front, the stock has support level of ~$2.495 and resistance of ~$2.909. We have valued the stock 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 in FY20, track record of paying decent dividends, revised business strategy, modest long-term outlook, valuation, and current trading levels, we give a “Buy” recommendation to the stock at the closing price of $2.550, up by 0.790%, as on 21 January 2021.
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ORA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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