A Tale of Two Countries

Orora provides tailored packaging and complementary services to its clients. The company recently held an investor day focusing primarily on its Australasian and North American operations.

 

We now have greater confidence in our growth expectations for the Australasian division and we see potential upside to our earnings estimates. For North America, management believes growth in its end markets remains challenged, but it flagged potential investment in the division – both organic and through disciplined M&A. We maintain our Accumulate recommendation with a $3.55 target price.

 

The presentations were focused on the following key areas:

 

  • Energy – Orora has secured a long-term electricity agreement for NSW and Victoria that reduces the annualised impact to $7m in 2018, from its previous estimate of $12–16m. The power purchase agreement became effective from 1 May 2018. Relative to our published estimates, this implies an earnings before interest and tax benefit of about $1m in 2H18, $3.5m in 1H19 and $2.5m in 2H19.

  • Old corrugated cardboard (OCC) – The company’s sensitivity to OCC in 2H18 has been reduced to $0.5m per $10/t movement in prices, down from the $1m estimate provided at the interim result. Explicit guidance for this sensitivity was not provided for periods further out.

  • Glass – Orora flagged it was investing $35m in new glass warehousing capacity, with the structure to be completed by the end of 2019. Efficiencies and cost reductions are expected to drive returns of at least 15% on invested capital. Further capacity expansion is being investigated following an investment of $42m recently that added capacity of 60m bottles, with a targeted return of 20% by Year 3. The investment was considered justified in light of growth in the export market for Australian bottled wine.

  • North America – Growth in end-market demand for the North America operations remains challenged, with trends consistent with those reported at the first-half result but below recent years. Management acknowledged it could take some time to pass through the recent paper price increase to its customers – the third increase in 18 months. Similar to other industrial and distribution businesses in the US, we believe rising freight rates could also challenge margins in the near term.


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