Bulking back up
As far as defensively positioned portfolio exposures go, we believe that packaging company Orora (ASX, ORA) continues to fit the fill on a number of levels. Underlying demand within the segment has remained strong, despite trade frictions. The company is also combatting cost pressures through productivity improvements, and technological investment. We have also remarked that a robust balance sheet would support further accretive acquisitions, and we did not have long to wait, with another deal announced a few weeks ago.
The shares have performed strongly overall since the demerger from Amcor, and we believe weakness since the full year results in early August represents a good opportunity for Members without a holding to gain one.
We recommend Orora as a buy for Members without exposure.
What’s New?
Since the demerger from Amcor in 2013, Orora has clearly benefited in our view from improved management focus, and with management drilling down on the company’s core competencies. This has also seen the company expand via focussed acquisitions both at home and abroad.
The company’s North American business has seen some headwinds, not least of which has been a stronger US dollar, but is making good progress in our view, and also on an investment in technology which will drive future growth.
Deal-making has also continued, and the company announced at the end of August that it is buying Texas based packaging distributor Bronco Packaging Corporation for US$24 million. This will help drive the Orora Packaging Solutions (OPS) business in North America.
Bronco is a 20-year-old business, and primarily serves corporate accounts in the fresh food manufacturing industry. The company has annual turnover of over US$50 million and provided ‘on-demand’ packaging delivery services, mainly to customers in Texas, but also having a network across the US.
Source: Bronco Packaging
Orora knows Bronco well through existing relationships, and management are expecting a smooth integration with OPS. The company expects to achieve synergies in procurement, supply chain, and back office functions over the next 1-2 years.
The deal certainly isn’t a massive one in monetary terms, but yet a further statement of management intent and growth aspirations in the large, but still very fragmented US market.
This also follows the acquisitions of Orora Visual in FY17. With net debt to earnings fairly moderate at 1.5 times, and undrawn bank debt capacity of some $354 million, this will not be the last acquisition near term in our view.
What also continues to stand out with Orora is the company’s ability to deliver double-digit earnings growth despite some flatness in core markets. The company is making some market share gains, but a concentrated cost-out program is also bearing fruit. Initiatives include locking in key energy costs – in Australia Orora has secured long-term renewable contracts (around 10 years) covering 80% of the company’s domestic energy requirements. The successful commissioning of the $23 million Waste Water Treatment Plant has also paid off.
Orora’s investments towards increasing capacity via ramping up production and efficiency (Fibre Refresh) and the Glass Warehouse Expansion have also improved operational profitability.
These efforts should ensure that margin strength, evident at the full year results, is sustainable. The company saw EBIT margins improve by circa 13 basis points from 7.48% to 7.61%
Turning to the charts and on the daily, overhead resistance situated at the all-time high of $3.72 has been respected. Medium-term momentum remains in favour of the bulls, as backed by the bullish moving average crossover present since last year. This is when the 50-day moving average (red line) crosses above the 200-day moving average (green line). The upward sloping green trend-line has remained as a support as has the 200-day moving average, but are being probed. A move back above the 50-day moving average would be positive.
With reference to the monthly chart, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement of $3.07 (red set of retracements). This was a positive event and activated two additional upside targets. The initial target of $3.33 being the 127.2% Fibonacci extension has since been achieved, which now leaves the 161.8% Fibonacci extension of $3.52 as the next focal point of resistance. This is currently being tested. Overall, the long-term uptrend remains firmly intact.
Summary
Packaging company Orora continues to fit the fill on a number of levels. Underlying demand within the segment has remained strong, despite trade frictions. The company is also combatting cost pressures through productivity improvements, and technological investment. We have also remarked that a robust balance sheet would support further accretive acquisitions, and we did not have long to wait, with another deal announced a few weeks ago.
The shares have performed strongly overall since the demerger from Amcor, and we believe weakness since the full year results in early August represents a good opportunity for Members without a holding to gain one.
Orora shares trade on approximately 21 times FY19 earnings estimates, falling to 19 times the following year, with a partially franked forecast dividend yield of 3.5% increasing to 3.75% over the same time frame.
Orora will remain held in the Fat Prophets portfolio. We recommend the stock as a Buy around current prices for Members without exposure.
Disclosure: Orora is held with the Fat Prophets Concentrated Australasian Share, and Small & Mid-Cap Models.
