Investment Thesis:

• Trading on fair value relative to the valuation and attractive yield of ~5%. 
• Exposure to both developed and emerging markets’ growth.
• Near-term headwinds should be in the price. 
• Revised strategy following recent strategic review.
• Bolt-on acquisitions (and associated synergies) provide opportunities to supplement organic growth.
• Leveraged to a falling AUD/USD. 
• Potential corporate activity.
• Capital management (current on-market share buyback plus potential for additional initiatives). 

Key Risks:

• Competitive pressures leading to margin erosion.
• Input cost pressures which the company is unable to pass on to customers.
• Deterioration in economic conditions in US, EM and Australia.
• Emerging markets risk.
• Adverse movements in AUD/USD.
• Declining OCC prices.

Key Highlights: 

• FY22 results summary. Compared to pcp:  Sales revenue was up +15.6% (+13% in CC) to $4,090.8m, underlying EBIT was up +14.6% (+12.7% in CC) to $285.5m and underlying NPAT was up +19.4% (+17.6% in CC) to $187.1m. 

• Underlying operating cash flow up +10.6% to $272.6m with cash conversion improving +60bps to 73.5%, driven by earnings growth and continued working capital management, partially offset by higher base capex, which combined with higher tax payments and +101.5% increase in growth capex delivered -27% decline in FCF to $121.6m. 
• Net debt increased +38.9% to $629m, driven by on-market share buyback and increased capex, equating to leverage of 1.8x, up +0.3x, vs long-term target of 2-2.5x. 
• RoAFE increased +250bps to 22.4%, reflecting higher North American earnings, partially offset by higher Australasian average working capital. 
• Capital management. The Company completed its on-market share buyback, purchasing ~30.7m shares at an average price of $3.55 and returning a further $109m to shareholders. The Board declared an unfranked final dividend of 8.5cps, up +13.3% YoY, taking full year dividends to 16.5cps (up +17.9% YoY) and representing a dividend payout ratio of 76.2%. 
• Australasia. Compared to pcp: Revenue increased +9%, as higher aluminium costs were passed through to customers and slight growth in Cans and Glass volumes, partially offset by Glass product sales mix. 
• EBIT increased +0.2% as inflationary pressures were more than offset by cost recoveries and improvement in operating efficiencies. However, margin declined -140bps to 16.6%, primarily due to the impact of higher aluminium costs passed through to customers.
•  Underlying operating cash flow declined -1.3% amid lower cash EBITDA, partially offset by lower base capex. However, cash conversion improved +70bps to 72.9%. 
•  RoAFE declined -80bps to 24.6%, driven primarily by higher average working capital.    
• North America. Compared to pcp: Revenue was up +17.7% (+14.3% in CC), amid improvement in operating performance, with revenue growth for OPS and OV. 
• EBIT increased +36.6% (+32.6% in CC) with margins improving +50bps to 4.2%, with significant earnings growth in both manufacturing and distribution driven by improvements in account profitability, operating efficiency, and a focus on managing inflationary inputs and cost to serve. 
• Underlying operating cash flow increased +28.7% or US$18.9m with cash conversion remaining stable at 74.1%. 
• RoAFE increased +530bps to 20.3%. 
• FY23 outlook. Management anticipates: Earnings increasing YoY. 
•  Australasia EBIT being broadly flat YoY with 1H23 impacted by inflationary cost increases ahead of further 2H23 customer price recovery, and cash conversion being >70%, excluding the G3 glass furnace rebuild, which is treated as base capex. 
•  North America is expected to deliver further EBIT growth, reflecting the full year impact of FY22 price increases and ongoing implementation of profit improvement programs, and cash conversion remaining >70%. 
•  Capex of ~$230m with growth capex of ~$150m. 
•  Dividends staying towards the top end of 60-80% of NPAT target payout range. 

Company Description:

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.   

(Source: Banyantree)

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