Orora: Balance sheet confidence

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
23 October 2021, 11:30 AM
Sectors Covered:
Industrials

  • Orora (ASX:ORA) has announced an additional A$150m on-market buyback at its AGM today following completion of the A$256m buyback in FY21.
  • Management also reiterated FY22 guidance for Australasia EBIT to be broadly flat and North America earnings to further improve. The additional information provided at the AGM was that Australasia EBIT will be down in 1H22 before returning to growth in 2H22.
  • We make no changes to FY22 Australasia and North America EBIT forecasts but adjust Australasia’s 1H/2H EBIT split following the extra AGM information.
  • We estimate the buyback to be 1% EPS accretive in FY22 and 2% accretive in FY23.
  • Our target price increases slightly to (login to view) and we maintain our Hold rating

A$150m on-market buyback announced

Orora (ASX:ORA) has announced an additional A$150m on-market buyback at its AGM today following completion of the A$256m buyback in FY21.

Management said FY21 ND/EBITDA of 1.5x (vs 2.0-2.5x target) was still low and, in the absence of immediate M&A opportunities in ANZ, believe the buyback was appropriate at this time.

Despite the buyback, ORA said the strength of the balance sheet, low leverage and the company’s strong cash generation still allowed for modest M&A.

FY22 priorities

In Australasia, ORA is investing ~A$110m to add an extra 10% to Can capacity to service the strong outlook for Can volumes and meet long-term customer extensions. The additional capacity is expected to be online in 2H23.

Furthermore, ORA has redirected most of the wine glass volume (~90%) impacted by China tariffs to other categories such as beer and water, although these will be at lower margins.

In North America, ORA said it remains on track to achieve OPS EBIT margins greater than 5% in the next 2-3 years and will start to explore M&A opportunities in 2H22. The OV strategic review, which will determine whether the business is retained or divested, is expected to be finalised by the end of 1H22.

FY22 guidance reiterated with additional 1H/2H information

Management reiterated guidance for higher group underlying earnings in FY22 (subject to global and domestic economic conditions and the continuing impacts of COVID).

Australasia FY22 EBIT is expected to be broadly flat (continued strength in Can volumes offset by subdued Glass volumes) while North America earnings are expected to further improve.

The additional information provided at the AGM was that Australasia EBIT will be down in 1H22 before returning to growth in 2H22.

Changes to earnings forecasts and investment view

We make no changes to FY22 Australasia and North America EBIT forecasts but adjust Australasia’s 1H/2H EBIT split following the extra AGM information. Following the changes, we forecast Australasia EBIT to be down 5% in 1H22 before rising 10% in 2H22.

We also incorporate the A$150m on-market buyback into our estimates, which reduces FY22-24F group underlying NPAT by between 1-3% due to higher net interest expense. However, FY22-24F underlying EPS rises by between 1-2% reflecting the lower share count.

Our PE-based target price increases slightly to (login to view) and we maintain our Hold rating.

Risks

Upside/downside risks include stronger/weaker economic growth in Australasia and North America, a lower/higher AUD/USD and falling/rising raw materials and energy costs.

COVID disruption remains an ongoing risk.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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