Lending Association

Return of doubts about Orora

A weak trading update, especially for its expensive French buy in late 2023, has seen the return of investor doubts about packaging group (and Amcor spin off a decade ago) Orora (ASX:ORA).

The shares fell 13 per cent in the first minutes of trading on Tuesday after the Easter break off the back of a weak trading update for the company, which contained a not-too-flattering mention of the performance of the $2.1 billion buy, Saverglass.

On the face of it, the small cut to earnings wasn’t all that big — a few million dollars. However, it was the gloomy remarks about the operating performance at Saverglass that worried the market on Tuesday.

The company said that after trading over the first 9 months of the 2023-24 financial year to the end of March, it expected a small drop in earnings for the year to June.

“At a Group level, excluding the earnings contribution from Saverglass for the seven months in FY24, earnings (EBIT) are expected to now be slightly lower versus FY23. The revised Group EBIT forecast excluding Saverglass for FY24 is between $307m – $317m compared to $320.5m in FY23.”

The company its Australasian operations saw continued strong performance from Cans which is expected to “offset the ongoing softness in customer demand in
Glass, with no immediate benefit expected in FY24 from the removal of taris on the export of Australian wine to China.

“Volume growth from exports to China is expected from FY25,” Orora predicted.

In North America the company explained that a “decline in average daily sales during the February to March trading period means that Management does not expect to see the normal seasonal uplift in June 2024 quarter daily sales.”

As a result, Orora expects its second half revenue in the US in the six months to June to be down 3 per cent from the levels in the first six months to December. That in turn sees the estimated EBIT for the June 30 year falling to a range of US$102 million to US$$107 million from 2022-23’s US$112.6 million.

But, at Saverglass, there is gloom as trading conditions remain weak with no immediate sign of any improvement.

Orora said that, following on from the reported December 2023 EBITDA of €14.2m (excluding AASB 16 Leases) and a similar operating performance in January 2024, “a weaker February and March trading result has confirmed that there is no noticeable improvement in forward customer demand as destocking is continuing, leading to a reduction in forecast sales tonnage in 2H24: down ~11 per cent versus the June half of 2022-23.”

“Despite some encouraging signs of improved consumer demand in certain markets, including in the important North American market, other markets including Europe, remain subdued.

“Volume uplift is anticipated once this destocking cycle has completed,” Orora said.

“As this is now not expected to occur in FY24, forecast EBITDA for FY24 (7 months) has been reduced from around €98 million to a range of €84 million to €88 million.”

Orora pointed out that the Saverglass EBITDA estimate is on a pre AASB-16 (Leases) basis under French GAAP reporting standards and “exclude the impacts of Purchase Price Accounting which will be performed for 2H FY24.”

The negative update and commentary could see a write down in the value of Saverglass once the purchase price accounting is done.

All this means that Orora’s balance sheet will see a sharp rise in leverage at June 30 to around 2.8 times EBITDA from 0.2 times at the end of December 2023.

To reassure investors, Orora said it “retains very strong liquidity, with over $600 million of committed undrawn liquidity, and with an average debt maturity of about 4.0 years.”

Orora announced the $2.1 billion purchase on September 5 and completed the deal three months later. The shares were over $3.30 in mid to late August and dipped to $2.69 a couple of days after the deal was revealed on September 5.

They struggled back to the most recent high of $2.90 in mid February and closed at $2.72 on the Thursday before Easter.

The shares on Tuesday fell to below the post announcement low in the wake of the disappointing update.