Market Position and Consumer Behaviour Changes Outweigh the Risks

Key Takeaways

• Strong market position and portfolio of leading brands continue to drive revenue growth.
• New strategic initiative and operating model, emphasizing organic growth within the company portfolio, along with value creation, optimization and streamlining of the portfolio, are expected to sustain future growth and enhance profitability.
• Increased regulatory pressure, and changing consumer behaviour as a result of weaker economic conditions, could negatively affect profitability & revenues.

Catalysts

• Company Overview: Orkla ASA is a leading supplier of branded consumer goods and concept solutions to the grocery, out-of-home, specialized retail, pharmacy and bakery sectors.
• Market Position: Orkla holds a strong market position in various segments, with a diverse portfolio of leading products in their category, that cater to a broad consumer base.
• Strategic Initiatives: The company has been focusing on strategic acquisitions and organic growth initiatives to expand its market presence and enhance shareholder value. Strategic divestments and an increased focus on organic value creation is expected to drive revenue and improve margins.
• Consumer Behaviour: Post-pandemic consumer spending is expected to normalise as deteriorating economic conditions impact consumer behavior.

Assumptions

• Assumed revenue growth of 9.00-9.74% for the next three years, before falling to a more normalized growth rate of 2.5% by 2034.
• Assumed net margins of 7.50-9.20%.
• Expected earnings to reach NOK 9.99 billion by 2034.
• Free Cash Flow as % of Sales of 3.80-5.50%.
• Discount rate of 5.82%.

Risks

• Consumer Behaviour: Economic downturns in various markets are affecting consumer behaviour, leading to increased pressure on sales volumes and a higher likelihood of consumers opting for private label products. There’s also a risk of channel distortion with a shift towards low-price chains.
• Customer Concentration: High customer concentration in several of Orkla’s key markets could lead to increased price pressure, delistings, and potential conflicts during customer negotiations.
• Macroeconomic and Geopolitical Conditions: Changes in these areas are impacting interest rates, exchange rates, and the global flow of goods. Prices and access to inputs continue to pose significant risks. The trend of increasing raw material prices slowed in 2023, but developments remain polarised across categories and companies.
• Climate Change: More frequent extreme weather events could affect input prices and production stability.
• Regulatory Conditions: Orkla faces risks related to regulatory conditions, especially in the area of ESG (Environmental, Social, and Governance). New regulations could necessitate increased investment in system support, increased costs due to stricter raw material certification requirements, and higher investment in production to support more sustainable production.

Valuation

• Base case of estimated value per share of NOK 84.40.
  • Base case of equity value per share of NOK 112.54
  • Margin of Safety (25%) of NOK 28.13.
• Given the current share price of NOK 85.50, the share is currently trading at a 1.3% premium.