Sandstone Premium InsightsBETA
Powered bySandstone Insights
Orora Limited (ORA)
HOLD

Can do

Investor briefing

Sector: Materials
Can do

Need to know:

  • New can line in Sydney adds 10% to capacity
  • China tariff issue now overcome
  • North America performing strongly

Following on from a good 1H22 performance, Orora has laid out its plans for further incremental improvement across the group.

A shift in demand from PET plastic bottles to aluminium cans is creating volume opportunities in the latter. ORA’s new can line in Revesby, Sydney will add 10% capacity at a project cost of $85 million.

ORA is targeting pre-tax return on investment of more than 15% when the facility is producing at scale which will be in about three years’ time.

The impact of the China tariff on wine glass volumes has been quickly overcome. ORA has been able to place volumes in new categories in just over a year, albeit at lower margins. This demonstrates management’s willingness to adapt to a situation and is now exploring opportunities to accelerate growth in new categories. There is also potential for new export markets but no detail yet. ORA will rebuild its G3 glass furnace in FY24f which could also enhance earnings.

The North American business was the highlight of the 1H22 result, improving earnings by weeding out unprofitable customers and taking advantage of engaging with others as price rises abound. The expansion of digital tools is providing greater granularity on assessing customer profitability. Acquisitions remain on the agenda for the North American business, but these are likely to be neither too large nor too small – gearing will remain in the 2.0-2.5x EBITDA leverage target range. Targets must have a strong value proposition such as pharma and medical applications where packaging is critical but low cost relative to the end product. ORA has three criteria: (1) add to ORA’s customer solution set (2) enable short/faster lead times and (3) enhance the businesses’ sustainability or fibre-based proposition.

The focus on sustainability will ultimately come at a cost to ORA. But any capital deployed to meet sustainability targets is expected to at least meet the company’s required return on capital. An example of this is the well-flagged $25 million Cullet beneficiation plant completing in FY22f which will help lift recycled content of its glass bottles from 40% to 60%. While it is unclear if the company will achieve a price premium for products with higher sustainability features, it will at least keep ORA in the game.

Investment view

Management is forecasting FY22f EBIT to be higher than FY21 with Australasian growth in beverage in 2H22, sustained improvement in North American performance in 2H22 and a dividend towards the top end of its target 60-80% payout ratio. After a period of strong share price performance, we now lower our recommendation to Hold.

Risks to investment view

Earnings growth remains subject to global and domestic economic conditions, currency fluctuations and any further impacts from COVID-19.

Recommendation

We have lowered our recommendation to Hold from Buy after a strong recent run in the share price.

Stock overview

Stock overview

Key properties

Key properties

Financial forecasts

Financial forecasts

Share price

Share price

Company overview

Orora is a global packaging manufacturer, distributor and visual communication solutions company.

Disclaimers and Disclosures

Issuer

The information and opinions contained within Sandstone Insights Research were prepared by MST Financial Services Pty Ltd (ABN 54 617 475 180, AFSL 500557) ("MST").

Reliance

Whilst MST make every effort to use reliable, comprehensive information in the construction of its reports, MST make no representation, warranty or undertaking of the accuracy, timeliness or completeness of information in this report. Save for any statutory liability that cannot be excluded, MST and MST employees, representative and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person.

General Advice

Any advice contained within Sandstone Insights Research is general advice only and has been prepared without taking into account any person’s objectives, financial situation or needs. Any person, before acting on any advice contained within Sandstone Insights Research, should first consider consulting with a financial adviser to assess whether that advice is appropriate for their objectives, financial situation and needs. 

General Disclosures

This report should be read in conjunction with MST Disclaimers and Disclosures and is published in accordance with MST Conflict Management Policy which are available on the MST website: https://www.sandstoneinsights.com.au

Currency of Research

The recommendations made in a Sandstone Insights Research report are current as of the publication date. If you are reading a report materially after publication, it is likely that circumstances will have changed and at least some aspects of the analysis may no longer hold.

Access and Use

Any access to or use of Sandstone Insights Research is subject to the Terms of Use. By accessing or using Sandstone Insights Research you hereby agree to be bound by our Terms and Conditions and hereby liable for any monies due in payment of accessing this service. In addition you consent to us collecting and using your personal data (including cookies) in accordance with MST Privacy Policy, including for the purpose of a) setting your preferences and b) collecting readership data so MST may deliver an improved and personalised service to you. If you do not agree to MST Terms of Use and/or if you do not wish to consent to MST use of your personal data, please do not access this service.

Equities Research Methodology

Please click here for information about MST equities research methodology.