Orora (ASX: ORA) announced a deal to sell its Australasian Fibre Business to a subsidiary of Nippon. Investors reacted very positively to the news, which sent the stock price soaring. They believe that the cash is worth a lot more to Orora than the business unit would be under the current management team, which is why the stock re-rated. The reason why buyer still paid the price they did was to unlock latent value in the business through acquisition synergies, which, in their view, make the deal attractive.
Orora Production Facility (Credit: Orora)
Investors are optimistic towards the business after their recent annual results release, recording a 12.1% boost to revenue, along with a 4.0% increase in underlying profits. One piece of good news out of the result is that the difference between revenue and profit growth was largely due to decommissioning costs linked to their Petrie Mill site. Their EBIT margin actually increased by 50bps to 11.5% in Australasia, which was due to operational efficiency and cost improvement programs in fibre packaging. Margins did, however, deteriorate in the company’s North American business, owing to tough market conditions that the company’s cost reduction initiatives couldn’t counteract.
Orora opened new sites in Sydney for their fibre specialty packaging and WRS divisions. EBIT in Australia grew more than 10% organically, but the result was trimmed to 6.2% due to cost increases. The company has mentioned that they expect continued challenging market conditions in North America, which could weigh on earnings over the next year. Orora also expects internal cost headwinds from gas price increases, amounting to $3.5m for each half-year period. They anticipate a $5.0m cost increase from Kraft prices and anticipate that the rebuild of G2, and project Capex to sit at 120% of depreciation. Elevated levels of Capex are, in the management team’s eyes, necessary to differentiate Orora’s product in a saturated market.
Orora delivers packaging solutions across Australasia and North America and is aiming to use innovation to counteract the lack of existing product differentiation in their core business. One example using IntegraColor to enhance their plant tags for a client. The company created more detailed labels that linked to an online site through a QR code which gave further information and promotional materials about the plant. Orora is also a large-scale recycler, being diversified across paper, glass and cans, which helps attract clients to the business.
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).
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