Orora (ASX:ORA) is a business whose portfolio is in transition. In September 2024, the Company entered into a binding agreement to sell its US packaging distribution business Orora Packaging Solutions (OPS). We recently researched the Company in The Dynamic Investor to assess whether the ‘new’ Orora increases the shares’ appeal.
About Orora
The sale of OPS is expected to be completed at the end of 2024, whereby ORA will operate two segments:
i. Australian Beverages, which provides design and manufacturing solutions across glass, cans and wine closures.
ii. Saverglass – a global leader in design, manufacturing and decoration of high-end bottles for the premium & ultra-premium spirits and wine market.
Key Fundamental Drivers
Implications from Sale of North American Business
OPS is a North American based blend of packaging manufacturing and distribution focused on Small and Medium Enterprises. Revenues are split relatively evenly between the manufacture and supply of corrugate based packaging and distribution of traded packaging products.
Following the divestment of OPS, Orora is set to be a more focused beverage packaging company. Around half of Group EBIT will come from the Australasia beverages business. This business produces both cans and glass bottles for the soft drink, beer & wine markets. It operates in a duopoly structure, is mature and typically delivers mid-single-digit earnings growth.
Importantly, investor exposure to ORA’s high-quality cans business will increase. This is potentially positive for ORA’s valuation, given that peer Company Ball Corporation trades on a significantly higher multiple. In addition, margin mix improves, given that ORA’s global beverages operations reported 13.8% EBIT margin in FY24 compared to 5.6% for OPS.
Are Signs of a Recovery in Saverglass Appearing?
Saverglass continues to be impacted by de-stocking and weak consumer conditions (particularly in Europe). Having said that, ORA expects destocking to end in the 1st half of calendar year 2025, based on reducing inventory levels. The latter is supported by spirits volumes now being below the long-term trend demand. Also, demand should improve in calendar year 2025, as lower global interest rates should also be positive for spirits demand through improved macro conditions and consumer spending.
ORA noted that pro-active cost-out measures (utilisation and labour cost reductions) has mitigated the impact on profit from volume softness in Europe. In addition, there are signs of recovery in Saverglass’ North American order book for 2H25. However, this has yet to flow through to sales.
Expanding Capacity to Leverage Strong Cans Volume Growth
Volume growth in cans has been above the beverages market in Australasia and has benefited from the structural shift away from PET and glass in recent years, to cans. This shift is underpinned by the structural recyclability tailwinds underpinning aluminium can demand growth. ORA sees 4-6% pa growth in the Australia/NZ beverage cans market in the medium-to-long term. Accordingly, ORS is expanding plant capacity at several sites. This is expected to also underpin a resumption in robust earnings growth for Australian beverages in FY26.
Capital Management Initiatives
Aside from weak earnings from Saverglass, concerns regarding high gearing and have weighed on the stock over the past year. Gearing (on a net debt to EBITDA basis) as at 30 June 2024 was 2.8x and above the upper end of the Company’s 2.0-2.5x target range.
With net cash proceeds of $1.7b expected from the sale of OPS, gearing declines to 0.2x. This is because the Company intend to use the proceeds to reduce the net debt balance ($1.8b as at 30 June 2024) and fund increased CAPEX requirements for FY25. In particular, ORA increased FY25 CAPEX guidance from $240-260m to $350-380m, reflecting the pull forward of $130m in CAPEX to expand cans capacity at its Rocklea facility.
After reducing debt levels and funding additional CAPEX requirements, ORA intend to distribute any excess capital to shareholders. Details of this are yet to be confirmed. Given ORA’s limited franking credits, an on-market share buyback (up to 10%) would likely be EPS accretive. In the event gearing re-levers to the bottom end of the 2.0-2.5x target range, ORA would still be left with significant balance sheet capacity. This can be used to either pursue Merger & Acquisition opportunities or undertake further capital management.
Has Takeover Appeal Diminished?
On 13 August 2024, ORA received and rejected an unsolicited, non-binding indicative proposal from Lone Star Fund XII Acquisitions of $2.55 per share. At the time, a potential OPS sale provided some context to ORA management’s decision not to engage with Lone Star.
Following completion of the OPS sale, we consider that there is likely to be increased takeover interest in ORA. This is because its remaining suite of assets may also be attractive to other potential trade and financial buyers. In cans, ORA has a technology sharing agreement with Ball Corporation. This agreement provides ORA with advantages in relation to production efficiency (i.e. access to latest cans technology) and lower CAPEX procurement costs.
Fundamental View
A key consideration for investors is whether ORA’s business mix (post the proposed OPS sale) justifies a higher PE multiple. To this end, the increased contribution to earnings from Saverglass comes into consideration. Saverglass’ performance has disappointed since the business was acquired by ORA in December 2023. Also, the large-scale nature of the Saverglass acquisition coupled with management’s lack of a track record in integrating a deal of this nature, execution risk remains.
To this end, ORA is unlikely to earn a re-rating until it can demonstrate that the integration of the Saverglass acquisition results in improved financial metrics. Accordingly, we take a cautious view. However, a key risk to our investment view is increased corporate appeal post completion of the OPS sale.
Charting View
ORA has been trending lower since peaking in 2022. It rallied strongly in August on good volumes, which is a positive, but has once again started to fall back to create another lower high. The most likely path from here is that ORA continues to ease back. The next area of support is near $2.20-$2.30.
Michael Gable is managing director of Fairmont Equities.
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