Orora (ASX:ORA) is a stock which has been a favourite of ours for the last few years. With it now trading only a few cents off its all time high, could we possibly believe it to still be a buying opportunity? Here we lake a brief look at ORA’s fundamentals as well as technicals.
Around two-thirds of the Company’s earnings are generated from the Australasia division. This comprises two business group: Fibre and Beverages. The Fibre business includes Fibre Packaging (for fresh produce sectors), the Botany Recycling Mill (B9) and Packaging & Distribution. The Beverages business includes beverage cans, glass and closures. The balance is generated from the North America division. This comprises three main units: Orora Packaging Solutions (OPS), Corrugated board manufacturing, and Orora Visual. The latter is the Point of Purchase (PoP) Display business that the Company first entered in March 2016.
Heavy Investment to Generate Organic Growth in the Australasia Division
This investment entails upgrading printing, converting and corrugator assets, as well as in a digital printer (to be commissioned in 2H18) and new laser cutting technology. This investment is likely to support earnings momentum and further margin expansion. This is because the investment is expected enable the Company to bring to market premium products with innovative features.
Cost Pressures to Alleviate
Aside from serving to support organic growth rates, the investments are also expected to offset the impact of rising input costs. It is this which ORA is generally managing well. Old Corrugated Cardboard (OCC) is a primary feedstock for B9. Higher OCC costs in the first half financial year 2018 (1H18) were largely offset by the benefit of higher paper export prices to North America. Further, ORA renewed a number of short/long term and variable/fixed price contracts, which will see its gross EBIT sensitivity during 2H18 for a $10/mt movement in OCC price reduce by around one half.
Rising energy costs (another key input cost) has also been a challenge for ORA. The Company is mitigating this impact by increasing to ~80% the portion of its electricity requirements in Australia from renewable sources. Orora’s earnings benefit from this is expected to flow through in FY19.
Improvement Expected in North America Division
At present, the North America Division is facing some challenges. In the OPS segment the Company is seeing softness in some sectors in the US. Along with the rollout of SAP in the OPS segment, it has resulted in slower growth rates in comparison to historical rates.
In relation to the Orora Visual segment, the expected sales growth of ~2% is around half that of market expectations of ~4% for the acquired companies. The key reason for this is that the integration of the acquired businesses is running 6-9 months behind the Company’s expectations. ORA have also flagged additional costs (including additional staff and safety-related costs) which would continue to impact profitability of the Orora Visual segment in the near future.
Whilst there are challenges in the North America division, the slower growth in the latter is considered to be temporary. In particular, EBITDA margin in the North America division is expected to improve. This is because ORA is expected to extract synergies from acquisitions in the Orora Visual segment and growth in the OPS segment improves following the completion of the SAP rollout.
Orora’s Potential for Acquisitions
The balance sheet provides ORA with plenty of capacity to undertake further investments and acquisitions. This can be done without significantly increasing the gearing level. With the SAP rollout in the US now almost complete, the Company has revisited its acquisition pipeline for North America, where the acquisition pipeline remains healthy, with a number of M&A opportunities recently assessed by ORA.
Fundamental View of Orora
The shares are currently trading on a 1-year forward P/E multiple of ~19x, which we do not consider demanding, in light of the above factors. There is also acquisition potential, which remains a medium-term catalyst, as well as the fact that ORA is one of the best defensive stocks on the market.
Charting View of Orora
In the long term, the uptrend for ORA is still to the upside, as seen on this monthly chart. Any consolidation of the trend over time has been fairly flat (indicated by the blue lines). The last couple of months has seen ORA push beyond the recent consolidation to resume the uptrend. This means that the shares are likely to edge higher and any dip is a buying opportunity.
Michael Gable is managing director of Fairmont Equities.
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