Orora Ltd (ASX: ORA) continued to deliver a decent performance even during the first half of fiscal 2015, with the revenues surging by 3.4% to $1.67 billion, as compared to $1.61 billion in the corresponding period of 2014.The increase was mainly driven by the North America segment which rose by 9% yoy to $684.5 million, driven by organic growth as well as from acquisitions. Glass sales improved on the back of increase in market share in wine division and rising beer volumes. New Zealand fibre operation increased due to higher volumes from fresh food and recovering economic conditions. On the other hand revenue gains were offset by decrease in external paper exports to Asia, lower sales in ANZ packaging & distribution and exit of business from old corrugated cardboard. The Australasia segment witnessed a modest decline of 0.1% yoy to $982.1 million in the first half of 2015.
Earnings Summary (Source - Company Reports)
The group reported an EBIT increase of 14.6% yoy to $118.4 million, partly attributed to the firm’s cost reduction efforts, market share increase in wine segment for Australasia and FX benefits for North America business. The Australasia EBIT saw an increase of 10.7% yoy to $101 million, driven by fibre division earnings. The recycled paper Mill (B9) achieved a total cost reduction and innovation benefits of $9.1 million during the first half of 2015. North American EBIT also rose 20.4% yoy to $33.6 million, driven by Landsberg packaging solutions and manufacturing division cost efficiencies. Moreover, the group’s overall net profit after tax rose by 23% on a year over year basis to $69.1 million, and accordingly the EPS surged to 5.7 cents during the period, against 4.7 cents in the first half of 2014.
Australasia and North America EBIT trend (Source: Company reports)
Operating cash flow improved to $117.6 million, from $108.5 million in the prior corresponding period due to increase in EBITDA by $12.6 million as compared to the first half of 2014. Orora managed to decrease the average total working capital to 10.7%, against 10.8% in the corresponding period of last year, indicating better corrugated inventory management and better vendor trading terms, in spite of higher inventory positions built due to transition to imported aluminum sourcing model.
As per the corporate highlights, the group sold its Carton board mill site in Petrie, Queensland for an amount of $50.5 million to Moreton Bay regional council. The company will get $20 million in exchange of contract while the balance would be paid on the decommissioning of the site’s progress for the next two years. Orora estimates a profit of over $ 10 million through this deal. The group also entered into a supply agreement with Fonterra Co-op group, a dairy group in which Orora will be investing in Fonterra’s manufacturing facility to supply multi-walled dairy bags to Fonterra’s New Zealand milk powder operations. The group will infuse $20 million for developing a new bag production line, and Orora estimates to install the new machine during the second half of 2016. Meanwhile, the company has completed the US private placement of notes, raising US$250 million by issuing notes with eight and ten year maturities. Orora also completed the sale of surplus land at botany, new south wales although it derived very less profit through this sale.
Outlook
The shares ofOrora Ltd surged over 82.5% till date (as of July 22
nd closing price) since it spun off from the parent company Amcor Ltd. The group improved its dividends by 16.7% to 3.5 cents per share in the first half of 2015, from 3 cents in the comparable period of 2014, resulting in the dividend payout ratio of 61.4%. Meanwhile, Orora is making efforts to maintain a conservative balance sheet and was also able to decrease its net debt to $645 million as of December 2014, as compared to $694 million in the prior corresponding period. Working capital management remains an ongoing focus for the company. Orora improved its leverage to 2.1 times in the first half of 2015 from 2.4x during pcp, and from 2.2x in June 2014. RoAFE improved to 11.2% in the period from 9.8% (pro forma) pcp, driven by increase in earnings. Orora will continue to witness organic growth, and with the cost reduction efforts by the company, earnings might improve further as compared to 2014 (on a pro forma basis). The group estimates to deliver over $20 million of total B9 benefits for the fiscal year 2015.
On the other hand, we believe that group’s potential positive performance have already been factored in its share prices, with the stock delivering a year to date returns of over 12.3%, against the broader index S&P/ASX 200 performance of 3.8%. Moreover, the valuations of the company are relatively expensive with the stock’s P/E at 28.35x, which is higher as compared to its peers. Based on the foregoing, we give an “Expensive” recommendation to the stock at the current price of $2.28, and would review the stock later.
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