Orora worked hard to deliver an in-line result for the year, but it doesn’t get any easier in FY23f. Operational improvements are on-going and there is a heavy capex profile ahead, just as inflation is biting and consumer demand is wavering.
Group underlying EBIT increased 14.6% to $285.5 million in FY22 on a revenue increase of 15.6%. North American revenue (78% of group) increased 17.7% (14.3% on a constant currency basis) and Australasian revenue increased 9.0%.
The North America OPS (Orora Packaging Solutions) business has been assisted by a favourable pricing backdrop with 15 price increases in 24 months. The EBIT margin has improved over that time, but the easy wins extracted from customer profitability improvement may now give way to some demand weakness and some destocking by customers. ORA is continuing to implement profit improvement programs as an offset, but the OV (Orora Visual) segment is at the early stages of this program. The full year benefit from prices increases will help and the absence of one-off items.
Australasian packaging is facing 1H23f hurdles from rising freight, energy and materials costs. Contracted price changes will impact in 2H23f which should effectively cancel the cost rises. ORA is pressing ahead with cost reduction programs.
Group growth capex is about to get much bigger than recent years (Figure 2). FY22 growth capex of $50.8 million was already $25.6 million up on FY21 with money spent on new canning line and ends capacity at the Dandenong and Ballarat plants ($26.9m) plus construction of the Cullet Beneficiation Plant ($19m). FY23-25f growth capex plans amount to approximately $325 million and include ~$130 million on glass operations, and ~$195 million on canning operations in Australia. The $90 million glass furnace (G3 at Gawler, SA) rebuild occurs every five years.
Investment view
Company guidance is pointing to EBIT growth in North America for FY23f, but this might be low single digit at best. Internal operating efficiencies can only go so far, and the customers will decide if revenue growth is real or imagined.
Energy costs comprise about 10% of Australasia’s total costs with glass making up 75% of the energy spend. ORA has a number of fixed price contracts that will limit the ravages of rising energy costs.
Inflation and supply chain issues will persist into FY23f, partially thwarting the good work going on in operational efficiency.
The business is looking evenly poised, in our view.
Risks to investment view
Earnings growth remains subject to global and domestic economic conditions, currency fluctuations and any further impacts from COVID-19.
Recommendation
We have retained our Hold recommendation.
Figure 1: fy22 result
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Figure 2: capex
Figure 3: US operations US$m
