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ORA

Orora Ltd – Exposure To The Packaging Industry & A Return To Economic Growth

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Orora Limited (ASX: ORA) provides a range of tailored packaging and visual communication solutions. This includes design and manufacture of packaging products. Orora was listed on the ASX in December 2013 and has a market capitalisation of around A$2.3 billion.

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Has Orora sold its Australasian Fibre Business?

In October 2019, Orora announced the sale of its Australasian Fibre Business to a wholly owned subsidiary of Nippon Paper Industries Co., Limited for A$1,720 million. This sale was completed in April 2020.

As a result of this sale, Orora provided a pro rata cash return of around A$600 million (or A$0.497 per share) to shareholders, comprising capital return of A$150.0 million (or 12.4 cents per share) and a special dividend of A$450.0 million (or 37.3 cents per share (50% franked)). This cash payment was made to shareholders on 29 June 2020.

What are Orora’s remaining businesses?

Orora has two main remaining business operations. The first is the Australasian Beverage Business. This business is a leading supplier of aluminium cans, glass bottles and wine closures in Australia and New Zealand. The business has the number one market position in cans and glass wine bottles and number two in wine closures and glass beer bottles.

The second is the North American businesses, namely Orora Packaging Solutions and Orora Visual. Orora Packaging Solutions is a top 5 company in the highly fragmented US$50.0 billion packaging distribution market segment in North America. Orora Visual is a top 5 company in the US$10.0 billion point of purchase/visual displays market segment in North America. Orora believes there is potential to grow its North American businesses through leveraging superior products, service levels and a nationwide footprint.

What was Orora’s recent profit result?

Net profit after tax for the half year ended 31 December 2019 from continuing operations (that is, excluding the Australasian Fibre Business) was A$76.6 million and earnings per share was 6.4 cents per share. Sales revenue was $1,835.2 million, up 13.3% on HY19. The interim ordinary dividend for the half year ended 31 December 2019 was 6.5 cents per share (30.0% franked).

The Australasian Beverage Business EBIT for the half year ended 31 December 2019 was up 1.8% compared with the same period in 2018. The higher earnings were driven by stronger can volumes. While glass volumes were in line with a year earlier, earnings were down slightly due to product mix and rising input costs. The new glass warehouse was completed in the half year ended 31 December 2019 and the rebuild of the G2 furnace has commenced.

The North American businesses EBIT for the half year ended 31 December 2019 was down 17.2% compared with the same period in 2018. However, Orora Packaging Solutions’ earnings improved in the half year ended 31 December 2019 relative to the half year ended 30 June 2019. Orora has implemented and is continuing to progress an earnings improvement initiative (including restructuring activities). Orora’s management notes that the benefits from these programs started to flow from the December quarter 2019.

The Orora Visual business experienced a reset in the half year ended 31 December 2019 with earnings impacted by customers’ deferral/removal of several major summer promotional campaigns, softness in the packaging and entertainment segments and the loss of key sales representatives predominantly in the entertainment sector. While the performance of Orora Visual is disappointing, management is committed to the business and delivering on the available growth opportunities to drive improved earnings and returns.

What is the immediate outlook for Orora?

In terms of the outlook, in February 2020 Orora management expected that challenging market conditions would result in reported operating EBIT for the continuing operations being lower in FY20 compared with FY19. In May 2020, Orora announced that the adverse financial impact from Covid-19 in the first half of 2020 is estimated at approximately A$25.0 million. This adverse impact is predominantly sourced in the North American businesses. Orora will be reporting its FY20 result in coming weeks.

What is Orora’s share price?

Orora’s share price is around A$2.40 (17 August 2020). Orora trades on a forward P/E ratio in the mid-teens and a dividend yield of around 5% (partly franked). Orora’s share price was trading at around A$3.30 in January 2020. While Orora mainly operates in mature low growth markets, it could be the beneficiary of an upturn in economic activity over the next few years assuming issues round covid-19 subside.


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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