Packaging company Orora Group is benefiting from the shift in Australians’ beverage consumption habits to more at-home drinking. Orora does the majority of its business in the beverage industry.
Its strong position in beer and wine packaging both here and in the United States has attracted the attention of DNR Capital, which has added the stock to its Australian Equities Income Fund.
DNR says the stock is undervalued. Based on DNR’s forecast for the company’s 2021/22 earnings, Orora is trading on the price-earnings (P/E) multiple of about 11 times earnings. In recent years, the company has traded fairly consistently on a P/E of around 20 times.
DNR says: “Orora offers an underlying earnings per share (EPS) compound annual growth rate of around 5 per cent from 2019/20 to 2021/22 and a dividend yield of around 5 per cent. This is an attractive investment proposition and represents a substantial discount to domestic defensive stocks.”
Another factor that has attracted DNR’s attention is the company’s move, last month, to strengthen its balance sheet with the $1.5 billion sale of its Australian Fibre subsidiary to Nippon Paper. Orora intends to return a sizeable chunk of the proceeds to shareholders.
DNR says: “The potential of a special dividend/capital return (plus franking) is very attractive, representing a one-off yield of around 25 per cent at current prices, in the current environment, with company dividends generally under pressure.”
Orora, which has a market capitalisation of $3.2 billion, designs, manufactures and supplies packaging products and services to the grocery and consumer goods markets in Australia New Zealand and the United States. It has a wide range of products, including glass bottles, aluminium cans, closures and caps, boxes and cartons, point of sale displays, recycled paper, bags and sacks.
Its biggest market is the beverage industry, which accounts for about 60 per cent of earnings. It is the major supplier of bottles to the Australian wine industry, with an estimated 70 per cent market share.
From November 2019 to February this year, the stock traded in a range between $3.20 and $3.30. During the COVID-19 sell-off it fell to a low of $2.32, before recovering to $2.77 early this month.
It is currently trading around $2.60. Based on its 2018/19 earnings per share of 19 cents, the stock is trading on a P/E multiple of 13.8 times.
Orora has a relatively new management team, with chief executive Bran Lowe taking up the reins last October and chair Chris Roberts retiring in February to be replaced by Rob Sindel. The new team is currently undertaking a strategic review of the business, “assessing competitive strengths in key market segments and identifying growth opportunities to leverage core strengths.”
DNR says there is scope for further assets sales, which could trigger further capital returns.