Morgans Financial Limited

Given another solid result, we become increasingly confident in Orora's (ORA) ability to execute on its growth strategy. This is despite a number of input cost headwinds in the Australiasia business and, in our view, shows the strength of the underlying business and the quality of the management team.

Key points

  • Orora's (ORA) FY17 result was broadly in line with our expectations but higher than Bloomberg consensus estimates.
  • Australiasia EBIT +2% and North America EBIT +23% (in USD terms).
  • Our FY18F EBIT remains unchanged while underlying NPAT rises 2% to A$199m.

FY17 result slightly ahead of expectations

FY17 underlying EBIT rose 11% to A$302.3m (+0% vs Morgans and +2% vs Bloomberg consensus), while underlying NPAT grew 14% to A$186.2m (+1% vs Morgans and +3% vs Bloomberg consensus).

The result was driven by a strong performance from North America (EBIT +23% in USD), with Australasia (EBIT +7%) benefiting from ongoing delivery of self-help programs that more than offset input cost headwinds. The balance sheet remains strong with net debt/EBITDA falling 1.6x (FY16: 1.7x) and pleasingly, return on funds employed (ROFE) improved 90bps to 13.6%. Management remain confident they can increase ROFE to 15% over the next couple of years. We estimate ROFE to increase to 14.7% by FY19, and if achieved, will be a strong outcome given ROFE was 7.2% in FY13.

Free cash flow (excl. one offs) was up 2% to A$215.5m and FY17 DPS of 11.0cps was slightly ahead of our forecast (10.4cps).

Plenty of capacity to pursue growth investments

FY17 ND/EBITDA at 1.6x remains well below management's 2-2.5x target range. While management's current focus is on integrating the recent acquisitions within Orora Visual and driving organic growth and implementing the ERP system within Orora Packaging Solutions (OPS), ORA's strong balance sheet gives it the flexibility to continue to pursue growth investments. Management said the pipeline for acquisitions remains healthy and there were also a number of organic growth initiatives that the company is pursuing. Given this healthy pipeline, capital management is not a priority at the moment. However, management did not rule out making a larger acquisition if the right one came along. Given the strong balance sheet, we estimate ORA has capacity to make a A$400m acquisition and still be within management's leverage target range.

Minor earnings forecast changes

Given the FY17 result was broadly in line with our expectations, we have made minimal changes to FY18-20F earnings. FY18F EBIT remains unchanged at A$322m while underlying NPAT rises 2% to A$199m due to lower net interest expense. We make similar adjustments to FY19 and FY20 forecasts.

Contributed by Alex Lu, Analyst, Sectors Covered: Industrials: (VIEW LINK)


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