Australia | Oct 22 2020
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Orora has strengthened its packaging business in North America in the first quarter, with earnings growth that surprised to the upside, while Australasia remains flat.
-Earnings recovery gaining momentum
-Re-rating to come from sustained improvement in North America
-Australian beverage division affected by poor wine vintage
By Eva Brocklehurst
Orora ((ORA)) has combatted the restrictions created by the pandemic by strengthening its business through enhancing and expanding products & services, achieving earnings growth in North America in the first quarter which surprised several brokers.
In contrast, Australasian beverages were in line with the prior corresponding quarter while there remains scope to invest in new capacity and expand offshore. No formal earnings guidance was provided at the AGM.
Orora Packaging Solutions has stabilised, brokers note, and future growth is expected to be underpinned by the digital transformation. Meanwhile, Orora Visual continues to build its value proposition.
Taking advantage of the economic disruption, the company bought raw materials in the June quarter to use rebates and improve subsequent margins while also cutting 100 personnel. Orora has increased its sales of personal protective equipment and the SAP system is no longer impacting on productivity.
Credit Suisse now expects modest growth in FY21 and upgrades estimates by 10% across the forecast period, also upgrading the valuation of the packaging distribution business, which it describes as a rare asset that could surprise in terms of transaction value.
Goldman Sachs assesses the earnings recovery has gained more momentum, although considers this largely captured in the share price, retaining a Neutral rating and target of $2.69.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, believes the share price adequately balances a stronger short-term outlook with concerns surrounding execution risk in North America.
Morgan Stanley agrees Orora is well-positioned, although acknowledges the poor wine vintage in Australia will affect the second half. With defensive earnings, a strong yield, capital management and upside for North America, the broker asserts the current multiple presents attractive value.
Orora remains committed to improving its North American business, which accounts for 37% of Macquarie's FY21 earnings (EBIT) estimates, rather than selling it. While the recent quarter showed positive momentum, the broker wants evidence this is being sustained.
With management clearly signalling intentions to pursue growth, the broker believes this must come from organic initiatives as M&A is limited.
UBS suspects the recent restructuring in the US will help offset the challenging market conditions from the pandemic and the pending presidential election, and expects North America will deliver EBIT of $85m, up 10%.
Any re-rating, therefore, will need to be derived from a sustained improvement in North America where the broker suspects investor confidence is low following several periods of underperformance.
UBS is attracted to the Australian beverage division as the business holds a dominant position in a defensive duopoly and there are significant barriers to entry. In Australian beverages Macquarie forecasts flat segment earnings in FY21.
The outlook for wine-related glass is tough, as the grape vintage is reduced and exports subdued. Greater clarity on the wine sector outlook is required as China's tariff uncertainty continues. Orora is also open to adjacent growth opportunities in Australasia and the broker notes potential for further domestic expansion in cans and offshore.
FNArena's database has six Hold ratings and one Buy (Morgan Stanley). The consensus target is $2.73, suggesting 0.4% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.2% and 4.6%, respectively.
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