FY18 result – broadly in line with expectations
FY18 underlying EBIT for Orora (ORA) rose 7% to A$323.4m (-1% vs Morgans estimate), while underlying NPAT grew 12% to A$208.6m (in line with Morgans estimate). The standout of the result was Australiasia which continues to benefit from organic investments and cost efficiency. The main negative was North America which was impacted by ERP transition costs at Orora Packaging Solutions (OPS) and the liquidation of Toys 'R' Us which adversely affected Orora Visual (OV).
The balance sheet remains strong with ND/EBITDA reducing slightly to 1.5x (1.6x at FY17 and well below the 2.5x management target). Operating cash flow was down 6% to A$329m mainly due to higher working capital, while dividends per share of 12.5 cents per share was in line with out forecast.
Looking to get back on the M&A trail
Orora was relatively quiet on the M&A front in FY18 largely due to a management decision 12 months ago to make sure OPS has a solid ERP foundation. The rollout of the ERP system has taken significant resources and management attention. With that nearing completion, management's focus can return to pursuing a healthy acquisition pipeline. Management was seeing a number of opportunities at both the A$30-40m and A$75-125m price points, although indicated a preference for a A$75-125m purchase given it usually comes with better systems and infrastructure.
We estimate ORA has capacity to make up to A$500m worth of acquisitions while remaining within leverage targets and see any announcements as potentially positive catalysts.
Decreases to earnings forecasts reflect cost headwinds
We reduce FY19F underlying EBIT by 3% to A$346.5m, largely due to higher input costs having an adverse impact on earnings. We also decrease underlying EBIT for FY20F and FY21F by 5%.
We continue to view Orora (ORA) as a high-quality, defensive business. While ORA encountered a number of headwinds in FY18, we think management are doing a good job under the circumstances. Headwinds will likely continue into FY19, but with the ERP rollout at OPS nearing completion and plenty of balance sheet capacity for organic growth investments or M&A, we believe the medium term earnings outlook remains solid.
ORA remains our key pick in the packaging sector. We retain our Add recommendation.
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