Treasure Chest | Jul 03 2020
Orora has divested its fibre business and Morgan Stanley believes the ongoing review is an opportunity to unlock value, in North America in particular.
-Bulk of the remaining $600m likely to be returned in FY21-22
-Limited impact from coronavirus outbreak to date
-Review an opportunity to unlock value in North America
By Eva Brocklehurst
The divestment of the company's fibre division provides several options for Orora ((ORA)) including acquisitions, returns to shareholders and a reworking of its American business.
The focus in Australia is now on the beverages business, as the company has more than 60% market share in wine and cans. Australasian beverage consumption was strong in March and early April although this has eased back.
Wine demand has been soft, with Australian wine exports down -7% over the year to March 31. Yet UBS suggests investment in can/glass beverage assets in Australasia is the most probable option for growth over the short term.
Orora is undertaking a review of its strategy for the continuing businesses, intending to pursue growth opportunities and, without these, return excess capital to shareholders.
Morgan Stanley had anticipated a larger portion of the proceeds from the sale of the fibre business would be diverted to shareholders in FY20. Orora has returned $600m, comprising a $450m special dividend and $150m capital return. The bulk of the remaining $600m is likely to be returned over the course of FY21-22 via an on-market buyback, the broker believes.
The company has sustained a limited impact from the coronavirus outbreak to date and the majority of this is in North America. Orora expects a second-half earnings reduction from the pandemic of around -$25m.
This is predominantly in those businesses that service retail, entertainment convenience and manufacturing. Morgan Stanley, as a result, reduces North American earnings (EBIT) estimates to $80m and, overall, has reduced FY20 group earnings estimates by -10% to $234m.
The broker believes the review is an opportunity to unlock value in North America, particularly in underperforming segments such as Orora Packaging Solutions and Orora Visual.
The focus is on a recovery, Macquarie agrees, although highlights that the potential for a second wave of COVID-19 needs monitoring, as Texas, a reasonably sized market for the company, has experienced an acceleration in cases.
Orora has undertaken a share consolidation at 0.8:1. Macquarie notes there is no change to overall market value but the value per share increases because of the lower share count. As a result the broker has raised its target to $3.05 from $2.44.
Morgan Stanley believes Orora is an attractive defensive exposure and retains an Overweight rating, the only one among six Hold ratings on FNArena's database. The broker's price target had increased to $4.38 following the share consolidation but is now lowered to $3.30, because of lower earnings estimates for FY20.
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