Saverglass Modernization And Australasian Expansion Will Improve Future Operational Efficiency

Key Takeaways

• Strategic divestitures and facility optimizations aim to enhance operational efficiency and net margins, supporting revenue growth and earnings improvement.
  
• Expansion and modernization initiatives in glass and cans segments drive potential revenue growth through enhanced production capabilities and market positioning.
  
• Declining wine demand, operational shifts, financial pressures, and potential U.S. tariffs pose risks to Orora's revenue and earnings growth.

Catalysts

Designs, manufactures, and supplies packaging products and services to the grocery, fast moving consumer goods, and industrial markets in Australia, New Zealand, the United States, and internationally.

• The transition from a 3-furnace to a 2-furnace operation at the Gawler site and the redirection of Australasian Glass demand to the Saverglass facility aim to optimize production and reduce underutilization, potentially improving net margins and operational efficiency.
  
• The sale of the OPS business for $1.8 billion strengthens Orora’s balance sheet, providing capital for organic growth investments and shareholder distributions, which could boost revenue potential through increased operational capacity and strategic buybacks, enhancing earnings per share.
  
• Ongoing premiumization in the Glass market and the strategic positioning of production capabilities to grow into underutilized markets might drive future revenue growth in the Global Glass business, benefiting from higher-margin products.
  
• Expansion plans in the Australasian Cans segment, including the commissioning of new capacity at Revesby and Rocklea, are expected to enhance production capability and support revenue growth as customer capacity grows, which should positively impact earnings.
  
• Cost reductions, synergies, and a modernization project at the Ghlin plant in Belgium for Saverglass are expected to create operational efficiencies and solidify market positioning, potentially improving net margins and supporting earnings growth over the medium term.

Orora Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orora's revenue will decrease by 22.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 8.2% in 3 years time.
• Analysts expect earnings to reach A$192.9 million (and earnings per share of A$0.17) by about August 2028, up from A$167.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$163.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the AU Packaging industry at 16.1x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Orora Future Earnings Per Share Growth

Risks

• The structural decline in commercial wine demand in Australia may not be fully offset by reopening wine exports to China or other alternatives, potentially impacting future revenue and margins.
  
• The transition from a 3-furnace to a 2-furnace operation at Gawler due to underutilization could result in decreased productivity and performance, affecting earnings.
  
• Softer demand and volume softness, especially in the Saverglass segment, along with industry-wide capacity reductions, might continue to pressure revenue and EBIT.
  
• Increasing net finance costs, partly due to the acquisition of Saverglass, might pressure net margins if they are not sufficiently offset by operational improvements.
  
• The potential imposition of U.S. tariffs on glass imports could disrupt operations and affect revenue and earnings from North American markets.

Valuation

• The analysts have a consensus price target of A$2.309 for Orora based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.8, and the most bearish reporting a price target of just A$2.03.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.4 billion, earnings will come to A$192.9 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 6.5%.
• Given the current share price of A$2.11, the analyst price target of A$2.31 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.