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.