Company Update: Orora

Friday, March 15th, 2019

Since demerging from Amcor at the end of 2013, Orora (ORA) has delivered five years of consistent earnings and dividends per share growth. Dividends per share have increased from 3.0c in February 2014 to 6.5c in February 2019.  This is the result of an effective combination of low but steady underlying demand growth, ongoing business improvement initiatives and a proven bolt-on M&A strategy. At the current stock price of $3.07 the company is forecast to pay a 4.5%, 50% franked dividend yield over the next twelve months and to grow earnings per share by 7% next financial year.

In the most recent result, for the half year to December 2018, Orora’s earnings met consensus expectations. Earnings per share increased by 7% on the prior corresponding period, albeit assisted by FX movements, and the dividend was increased by 8%. The Australasian segment, which accounts for roughly two thirds of earnings, performed slightly ahead of expectations and North America was slightly below. North America was impacted by soft market conditions but also the non-recurring costs of a SAP implementation and a customer bankruptcy (Toys R US). Looking forward, the segment will benefit from cycling these one offs and a full period benefit of the Pollock Packaging acquisition.

While management is currently focused on bedding down recent acquisitions, there is plenty of balance sheet capacity to continue the M&A strategy in the medium term. Net debt equates to 1.8x forecast EBITDA for the current financial year, which is comfortably below the internal target of <2.5x and covenant of <3x.

The profit margins of this business (7% EBIT/sales) might give investors pause, because narrow margins can contribute to large earnings misses. However, given relatively predictable demand and a history of passing cost increases through to the end customer, Orora has been a steady earner. Returns on capital are adequate (ROE of 13%) and importantly have been increasing over time.

This is not a stock which is likely to deliver 20% earnings per share growth and see a massive rerating of its PE, but sometimes boring is good, especially recalling the recent market drawdown in the December quarter of 2018.


Clime Group owns shares in ORA

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