Tuesday 22nd August 2017
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Recent FY17 results from packaging business Orora went down a treat with investors, as the share price shot up 12 percent on the day of the release. The company reported an underlying net profit of $186.2 million at the end of June, up 14.4 percent compared to last year’s result and ahead of consensus estimates of $180 million. This better than expected result was mainly due to the IntegraColor acquisition (now Orora Visual) proving to be accretive.
On that note, revenues inched up 4.9 percent to $4.04 billion with Australasia bringing in around a half of sales at $2 billion growing 2.3 percent year-on-year while the North American business bringing in the rest at $2.04 billion, and growing 7.6 percent over the same period.
Taking a closer look, however, shows that the IntegraColor acquisition actually provided circa 70 percent of the $189.4 million increase in turnover. Going forward, management indicated that as IntegraColor continues to integrate, more gains are expected from additional synergies.
EBIT came in at $302 million which was up 11.1 percent compared to last year’s $272.1 million and was also above the consensus estimates of $299 million. From an underlying perspective, the two key drivers of FY17 EBIT were (i) productivity gains from domestic operations, and (ii) synergies from the IntegraColor acquisition. Combined, this cause EBIT margins to improve 41 basis points from 7.07 percent to 7.48 percent.
Going forward, management has hinted towards underlying earnings growth from a combination of organic growth and some acquisitions. The company also made two recent deals in the US with The Garvey Group and Graphic Tech for a consideration of US$54 million, in order to expand the point of purchase footprint in Chicago and Los Angeles. The two new acquisitions are expected to add approximately US$90 million in sales annually and circa US$3 million to earnings in the first 2 – 3 years.
We see continued growth in operating cash flows which increased 5.6 percent year-on-year to $331.5 million. This should also help make some inroads into net debt which has increased to $44 million. Leverage though is still comfortable at 1.6 times which is below management’s target of 2.0 - 2.5 times and lower than last year’s 1.7 times.
Orora is currently trading on 18 times FY18 earnings estimates, although this drops to 17 times the following year, with a dividend yield of around 4 percent. Given the resilient nature of the company’s business, the growth opportunities in North America, and the scope for further cost reduction benefits, we remain favourably disposed to Orora’s shares at the current levels.
We believe Orora remains well positioned to capitalise on any improvement in economic activity. As was the case in 2016, Orora was able to deliver solid results despite generally subdued market conditions through a combination of efficiency gains, business improvement initiatives, acquisitions, and favourable currency translations. Looking ahead, we expect North America to remain the key earnings driver, at least over the near-to-medium-term.
The company has a proven track record of organic and acquisitive growth, and given the strong potential in the North American Business in particular, we see further room for shareholder gains.
Disclosure: Interests associated with Fat Prophets declare a holding in Orora.
Greg Smith is the Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE
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