Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
A defensive winner that has been flying under the radar
A stock that often flies under the radar is packaging company Orora (ASX:ORA), whose shares are hitting all-time highs with no sign of stopping. In fact, from its pandemic low-point of $2.20 in September 2020, the stock has gained 77 per cent, to $3.89. And, unlike most Covid-Winners, whose share prices have reversed post-Covid, Orora continues to hit higher highs despite a return to normality.
So, what does Orora do, that is so special or niche? The answer is quite simple, and it’s a defensive industry – packaging.
Remember Amcor? Eight years ago, global packaging giant Amcor demerged its Australian packaging business into a separate listed entity named Orora. This company has kept its roots and has retained its market-leading position as the king of creating sustainable packaging solutions for the beverage industry, such as glass bottles, aluminium cans and wine closures. The narrative is very much the same for Amcor (ASX:AMC), which has also done remarkably well post-Covid.
The packaging giant has three divisions: Orora Beverage Australia, Orora Packaging Solutions and Orora Visual both located in North America.
During Covid, Australia was faced with supply disruptions, cargo bottlenecks and Chinese tariffs on Australia wine exports. Despite having a solid framework and distribution network, the packaging giant wasn’t immune from Covid, and took a hit, posting lacklustre results for the 2020 financial year. According to company reports, the Covid-19 pandemic had a significant impact on Orora’s bottom line, costing roughly $25 million, of which 90 per cent came from its North American business.
Despite the headwind, Orora maintained its strong focus on the Australasian beverage business while its North American businesses expanded improvement programs to further reduce costs together with headcounts and the consolidation of its operating footprint in California.
The result?
A strong FY21 result that focused solely on delivering its core strategies in each business together with a disciplined approach to capital management. Highlights from the results:
- Underlying Group EBIT and NPAT up 11.6% and 23.7% respectively
- North American performance significantly improved with EBIT up 43.0%
- A solid Australasian result demonstrates the diversified strength and resilience of the beverage business.
- Final dividend of 7.5cps (unfranked), taking the full-year dividend to 14cps and ~80% of NPAT – the top end of the target payout range.
- $256.2 million capital return via an on-market share buyback.
- Positioned for growth, with strong cash generation and balance sheet position.
Through a culmination of great management and sheer determination, Orora was able to revise its business strategy so that it optimised and streamlined operations to ensure its Covid survival. Through this disciplined and tough approach, Orora has come out as a much leaner and meaner packaging firm. Its improved operating performance has more than offset the continuing impact of COVID-19.
Orora is covered widely by most of the broking firms. Macquarie has an Outperform recommendation with a target price of $4.05, against the current price of $3.97. The broker was impressed by Orora’s recent investor briefing, which signalled positive earnings momentum is continuing in the second half. Orora’s $85m investment in its cans business (at its Revesby, NSW site) represents a 20 per cent increase in capacity which adds further upside.
Orora trades on a PE of 24 times earnings, which is a touch above Amcor’s (ASX:AMC) PE of 20 times. Both stocks are well known for their stable and defensive qualities. To top it off, Orora expects FY22 earnings to be higher than in FY21. During volatile times, defensive plays with positive earnings and a rosy outlook are the type of companies that should find a place in any investor portfolio.
To conclude, Orora said, “We are confident that recent performance improvements are sustainable, and we anticipate further EBIT growth in FY22. Positive momentum is expected to continue into FY22 and correspondingly, we are forecasting further growth in underlying group earnings.”
