Orora Limited (ASX: ORA) is involved in manufacturing as well as distribution of tailored packaging, products and visual communication solutions to customers globally. With headquarters in Melbourne, Australia ORA aspires to become a leading provider of sustainable packaging solutions. The company has over 3.8k team members present across 7 countries.

Healthy Performance in FY21 (For the Year Ended 30 June 2021)

• It has recorded an 0.8% YoY decline in its sales revenue to $3,538 million. While, on a constant currency basis, the group’s revenue rose 7.8%.
• The underlying EBIT grew by 17.3% on a constant currency basis, and the reported underlying EBIT rose 11.6% YoY to $249.1 million.
• It posted a 23.7% YoY growth in its underlying NPAT prior significant items to $156.7 million.
• Further, it has logged a robust underlying EPS growth of 29% to 16.9 cents supported by growth in underlying NPAT (before significant items) and the effect of the on-market buyback.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Robust Pay Out

The company has provided an unfranked final dividend of 7.5 cents per share for FY21. This takes the overall dividend for FY21 to 14.0 cents per share, an increase of 2.0 cents per share or 16.7% over FY20. This signifies a healthy payout ratio of ~80% of NPAT, which is at the top end of its target payout ratio. This also represents the balance sheet strength and positive businesses outlook of the group.

Improved Cash Conversion

The company has recorded an improvement in its operating cash flow for FY21 to $246.0 million, an increase of $76.2 million over FY20. Thereby the cash conversion increased to ~73% from ~54%, owing to the impact of robust earnings, as well as the benefits of enhanced working capital management and lower base capital expenditure. Besides, the return on average funds employed improved to 19.9% from 15.8% on 30 June 2020 largely attributed to increased earnings across the entire business units.

Decent Balance Sheet

Driven by the company’s sustained emphasis on the disciplined approach towards growth investment prospects has enabled ORA to maintain a robust balance sheet. This provides the company with operating as well as strategic flexibility and a solid base to chase the next phase of its growth strategy. Also, the company is consistently looking for both organic and inorganic opportunities.

Besides, during FY21, ORA made a capital return of $256.2 million through the purchase of 89.3 million shares by way of its on-market buyback program. This represents an average price of $2.87 per share.

Key Metrics

ORA’s gross margin improved from 18.3% in FY 2020 to 19.1% in FY 2021. The gross margin stood at 19.1% in FY21, higher than the 18.9% recorded in FY17. Further, the company witnessed a sharp uptick in its ROE in FY21 as it improved significantly to 14.4% in FY21 from 2.1% in FY20 and compared to 11.2% in FY17. The company’s current ratio has also improved to 1.22x in FY21 from 1.19x in FY17.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 28.27% of the total shareholding while the top four constitute the maximum holding. Notably, Tyndall Asset Management and Perpetual Investment Management Limited are holding a maximum stake in the company at 5.65% and 5.13%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The group is exposed to the risk of major changes in the global macro-economic environment.  Continued deterioration in the economy may affect the value chain or industries that could have an adverse impact on its operational and financial performance. Further, it is prone to competitive risk as it operates in highly competitive markets. Moreover, the company’s businesses are susceptible to input price risks, particularly energy and other commodities.

Outlook

The company estimates its FY22 EBIT for Australasia to remain largely in line with FY21 as the benefits of sustained strength in the Cans business are likely to outweigh the effect of subdued glass volumes. Further, the company is making substantial strides towards the execution of its core strategic initiatives and the OPS in North America. Moreover, it expects the OV profit enhancement programs to persist and is also estimating further improvement in EBIT in FY22 as it remains assured of sustenance of advancement in performance.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation                               

ORA has delivered 9-month and one-year returns of ~+15.41% and ~+26.33%, respectively.

The stock has been valued using a Price/EPS multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average) considering better EBITDA margin as well as better ROE.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the closing market price of $3.070 per share, down by 2.540% on 6th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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