Australia | May 04 2022
This story features ORORA LIMITED. For more info SHARE ANALYSIS: ORA
Capacity expansion and acquisition activity look to support Orora’s guidance to prioritise growth over returns in its near future.
-Commentary from Orora points to growth over returns moving forward
-Sustainability trends should support expansion in canning and packing lines
-The company appears keen to pursue small acquisition targets in the US
By Danielle Austin
A period of growth through reinvestment looks to be ahead for global packaging solutions provider Orora ((ORA)), with the company outlining an intention to reinvest in itself through organic and inorganic means moving forward in an effort to prioritise growth over capital returns. The company has committed to a $220m investment in growth capital expenditure over the next three years.
Moving forward, company strategy looks to take advantage of continuing demand for sustainable packaging solutions, with the company pursuing an $85m expansion at its Revesby facility to enable a second can line and address heightened demand, with completion of the project expected in FY25. The investment follows an $80m expansion at its Dandenong can facility, which is due for completion in FY23, which combined should allow for a 20% increase in domestic can capacity.
In a bid to maximise benefit from continuing sustainability trends, the company will not only expand can capacity and continue to support demand for fibre packing solutions, but Orora is also targeting a goal of 60% recycled content in its glass beverage packaging by 2026. With a glass furnace rebuild due in 2024 the company plans for an upgrade to include oxy fuel technology that will enable a -20% carbon emissions reduction.
Management at the company continues to guide to full year earnings growth, with earnings momentum continuing into the second half. The company continues to hold a strong market position, with a 65% share of the domestic cans market making it the market leader in Australia, and despite an inflationary environment has been able to manage cost inflation in both the United States and Australia through price increases.
Stability in the US, but growth on the horizon
With the integration of the SAP system completed, Orora’s US-based operations are experiencing a period of relative improved stability and solid demand, but the company has indicated inorganic growth through merger and acquisition activity is ahead for the region.
With customer numbers reducing -20% benefits of the SAP system integration are appearing, with the reduction allowing a clearer focus on margins and custom packaging solutions expected to deliver further margin improvement, according to the company. Orora expects second half earnings for the US will be up on the previous comparable period.
Despite a $400m balance sheet capacity available to support growth initiatives, analysts note Orora appears gun shy given its acquisition history and looks to be conservative in its approach to acquisition, with experts expecting a series of small- or medium-sized acquisitions as a result. The company has indicated it will target acquisitions that can offer improved customer capability, operational and manufacturing lead times, and sustainability outcomes.
Of the four brokers within FNArena's coverage who have so far reported on Orora’s market update, three are Hold rated or equivalent and one is equivalent Buy rated, with an average target price between them of $3.96.
With an Equal-Weight rating and a target price of $3.80, Morgan Stanley expects Orora to retain around $280m in headroom for acquisitions after capital expenditure commitments at the end of FY23, anticipating this to increase to $500m by the end of FY25.
With the company intending to pursue merger and acquisition opportunities in the US, Morgan Stanley analysts noted the company suggested both the healthcare and technology sectors were of interest for potential acquisition activity. Despite acknowledging a bolt-on acquisition would likely be a positive catalyst, the broker not only noted an inconsistent record of US acquisitions, but further noted it sees better value elsewhere in the packaging industry.
Macquarie, which is Outperform rated with a target price of $4.05, notes despite a definite preference to pursue growth through acquisitions rather than further buybacks, the company may consider further buybacks if it fails to complete value accretive acquisitions.
The broker did issue 1%, 3% and 2% increases to its earnings per share forecasts through to FY24, largely incorporating the impact of the current 5% buyback, but noted its valuations are yet to take into account increased domestic can capacity and potential US acquisitions.
According to UBS, margin recovery in the US as operations stabilise should support medium-term earnings growth alongside an expected 20% production capacity increase in Australia off the back of facility expansion. The broker, which is Neutral rated with a target price of $3.80, anticipates Orora can deliver a 10% earnings per share compound annual growth rate through to FY24 given the company’s current growth strategy.
Ord Minnett points out the company's earnings should prove defensive but its Hold rating also reflects the view of limited share price upside without any M&A deals given the strong rally in the share price this year. The broker did lifts its price target to $4.20 from $3.90.
Combining all seven stockbrokers under coverage, Orora shares are rated five times Neutral/Hold and twice an equivalent of Buy. FNArena's consensus price target sits at $3.93, which is slightly higher than where the shares are trading at.
Forward looking dividend yields, on consensus forecasts, are 4.3% (running year) and 4.4% (FY23).
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