Sharechat Hot Stock: Orora

Fat Prophets

Friday 9th October 2015

Investing in innovation

What’s new?

Orora recently released its FY15 results, reporting solid growth in revenues and earnings for the 12 months to 30 June 2015. Fat Prophets has largely attributed this strong performance to an increase in its share of the Glass market in Australasia and a strong focus on securing larger corporate clients within its targeted markets in North America. A robust business performance across these core markets has offset fairly subdued market conditions.

Fat Prophets is also encouraged to see a strong commitment to innovation through a series of merger and acquisition (M&A) projects across the company’s Australasian and North American markets. These will not only allow Orora to enhance its market position in the North American food market, but also help it to expand its geographic footprint into Canada.

In Fat Prophets’ view, the innovative provider of packaging solutions is well positioned to invest in innovation projects after establishing the Orora Global Innovation Fund. This is setting aside approximately $45.0 million to be invested over three years to drive innovation. In addition, the company’s strong balance sheet will provide solid support for future merger and acquisition plans.

A strong US dollar against Australian dollar has also been favourable for Orora, as it received a $123.1 million foreign exchange benefit from its North American sales. We also note that Orora plans to proportionally draw down debt in currencies that align with the proportion of assets in those same currencies, thereby creating a natural hedge. This is prudent in our view.

Another key feature of Orora’s FY15 results was the company’s high earning quality ratio (CFO/EBIT) of 155%. Operating Cash Flow (CFO) remained strong at $254 million, up 68 percent from $151 million in FY14. The strong CFO generation provided more than sufficient cash for the company to launch its merger and acquisition plans, as demonstrated by the CFO/CAPEX of 208%.

Outlook

Orora believes that innovation will drive growth and plans to continue investing in innovation through merger and acquisition projects in Australasia and North America. The company plans to invest approximately $20.0 million in a new state of the art dairy sack line in Australia as a result of securing a long term supply agreement with Fonterra. Fat Prophets believes the long-term investments such as this demonstrate Orora’s strong commitment to innovation, which will benefit earnings in the long run.

Price

From a technical perspective, the outlook for Orora remains robust, with the share price having swiftly rebounded since revisiting the $2 region back in August. With current levels edging closer to resistance at $2.44, upward pressure appears to be building for a break out in the near term.

Worth buying?

A solid performance across Australasia and North America were the key drivers of the growth in revenue and profitability for Orora during the last financial year. Management also has a strong commitment to innovation and is pursuing this through a series of merger and acquisition projects in the future.

Fat Prophets believes this will not only allow Orora to enhance its market position in the North American food market, but also help the company to expand its geographic footprint in Canada. In Fat Prophets’ view, Orora’s strong cash-generating capability and a favourable liquidity position will provide the company with sufficient bandwidth to fund management’s growth initiatives, and in doing so deliver improved returns to shareholders.

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

Disclosure: Disclosure: Interests associated with Fat Prophets declare a holding in Orora is held with the Fat Prophets Concentrated Australasian Share, and Small & Mid-Cap Models.

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