Orora: Balance sheet confidence
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- By Alex Lu
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- Date posted:
- 23 October 2021, 11:30 AM
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- 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.
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.
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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