Orora Expands Outlook With Specialist Acquisition

Array
(
    [0] => Array
        (
            [0] => ((ORA))
            [1] => ((AMC))
        )

    [1] => Array
        (
            [0] => ORA
            [1] => AMC
        )

)

This story features ORORA LIMITED, and other companies.
For more info SHARE ANALYSIS: ORA
The company is included in ASX200, ASX300 and ALL-ORDS

-Major complementary expansion
-Opportunities in fragmented market
-Higher up the value chain
-But more capital intensive
 

By Eva Brocklehurst

Orora ((ORA)) has ramped up its acquisition strategy, acquiring US specialist packaging business IntegraColor. Up until now the company had completed just three small acquisitions and this represents its first major branching out since the de-merger from Amcor ((AMC)).

IntegraColor operates a vertically integrated business, which designs and manufactures point-of-sale retail displays across North America. The business operates in an adjacent market to Orora's existing North American packaging and distribution business.

The acquisition is likely to be the start of a ramp-up in the company's expansion plans, with substantial balance sheet capacity in evidence, Morgan Stanley asserts. The company is now employing its growth capital in several ways. Glass production has been increased recently in Australia and now the acquisition of IntegraColor demonstrates an ability to draw on an under-geared balance sheet to accelerate growth.

Even after incorporating $85m in acquisitions and a buy-back of $125m across FY17-18 in forecasts, the broker believes net debt to earnings is comfortably below management's target. Morgan Stanley suspects its FY15-18 compound growth forecast of 15.7% could prove conservative.

Moreover, the North American packaging segment is highly fragmented, with the broker noting around 80% of the market is small private business, typically beneath the radar of private equity. Hence, Orora is expected to find plenty of opportunities at attractive multiples which are also accretive. Morgan Stanley estimates management has potential to invest an additional $115m in mergers & acquisitions above a FY17-18 base case of $85m.

IntegraColor is based in Dallas, Texas, and most brokers consider the purchase price of US$77m is reasonable. Macquarie agrees the acquisition highlights the growth levers available and the company’s North American exposure has also increased and is expected to reach 39% of earnings in FY18, up from 28% in FY15.

Furthermore, Macquarie observes a shift up the value chain in the business margin relative to the legacy Orora business. IntegraColor's pre-synergy margin of 11% compares with the group's North American earnings margin of 5.5-6.0%, and Orora's overall margin of 9.7%.

Ord Minnett estimates the acquisition will be 3-4% accretive in FY17-18, with an implied uplift to valuation of around 7.0c a share. Importantly, the transaction is seen providing support for earnings growth at Orora beyond the benefits of the new B9 Botany mill.

Combining all the recent developments such as the glass investment, B9 benefits and organic growth, Ord Minnett estimates group earnings should increase by a compound 10% over FY16-19. The broker adds that while Integra is considered an adjacent, albeit complementary, business, its operations do share similarities to the fibre-based specialty packaging business in Australia.

There may be some similar features but IntegraColor is still a new segment in Orora's supply chain, Credit Suisse contends. The broker notes, to the company's credit, it has downplayed cross selling opportunities and, while industry sales appear stable, they are influenced by the level of retail promotional activity in the US economy.

Credit Suisse also highlights the highly fragmented nature of the industry, with the top four capturing just 20% of the market. Given the difficulty in finding significant packaging distribution acquisitions at the right price the broker believes Orora has opened up a new revenue stream. Unlike the broader print/publishing segment some organic growth in point-of-sale and display packaging is noted. Orora believes the market is growing at around 1-2% annually.

Credit Suisse does point to some cyclicality in the business, particularly in terms of promotional activity from retailers, but IntegraColor's diversification into horticulture suggests it will experience less exposure to promotional activity compared with its peers.

The IntegraColor business is also more capital intensive, UBS cautions, given its base of 40 different printing presses that service multiple substrate requirements. Its focus is on strongly customised, short-run work. UBS increases FY17-18 estimates by 4-8% to incorporate the acquisition and the glass capacity expansion. This is partially offset by higher interest costs. Still gearing is considered comfortable with scope for further growth opportunities.

The stock is not overly cheap but Morgans believes it deserves a premium multiple given its defensive characteristics and strong market position, particularly in Australasia. The broker considers the acquisition multiple is reasonable and there remains plenty of room to pursue further growth opportunities. IntegraColor enhances the company’s geographical diversity and will increase its exposure to the food and pharma/health sectors.

FNArena's database shows six Buy ratings and two Hold for Orora. The consensus target is $2.60, suggesting 8.0% upside to the last share price. Targets range from $2.25 (Deutsche Bank) to $2.80 (Citi, UBS).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms