new orora · 2019. 12. 31. · how i found this stock i acquired this stock through a demerger for...

Copyright © Colin Nicholson

Stock Journal

Orora

Important I am publishing stock investment journals of stocks I own only to provide examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

Therefore, the stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

You need to assess the relevance of anything in this journal to your investment plan, seeking advice from a licensed adviser if you are not able to make such an assessment for yourself.

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Terms and acronyms used in this journal See the Glossary page on the Free Resources menu for definitions. There are also articles on some of the ratios on the Fundamental Analysis Articles page on the Copyright Materials page.

If I use a term or acronym that is not in the Glossary, please email me for an explanation and I will add it to the Glossary page.

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How I found this stock I acquired this stock through a demerger for Amcor. The demerger terms were one Orora share for each Amcor share. Amcor began trading ex the demerger on 18 December 2013. On 17 December 2013 I owned 8,100 Amcor shares, so my entitlement is 8,100 Orora shares.

Company profile


Source: Orora Investor Slide Pack


Which model? There is no price history, so it is impossible to characterise the chart of Orora.

Based on Amcor’s chart it would be best to assume it will most likely be a value model chart.

Earnings and dividend quality Even though some pro-forma numbers were provided, it is difficult to really pin down past earnings.

Dividend policy is a 60-70% payout ratio, franked to the extent possible (US earnings may prevent 100% franking).

Return on Equity There is no really reliable data for this until the company makes its first reports.

My cost of capital 12.5% My hurdle rate for ROE 15% This company’s latest ROE Recent trend in ROE

Pre-purchase checklist There is not much available here yet.

However, on liquidity, we know the initial market capitalisation is $1.5 billion, so it should be liquid. Orora will go straight into the ASX200 index.

Chart analysis All we have is the first two days trading, which is not very meaningful:

18 19 20 23 24 25 26 27 30 31DEC 2013

1 2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 27 28 29 30JAN 2014

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2.00D @ D 181213-191213 ORA - ORORA LTD > Steady 1.22


Set stops With no prior chart, it is not possible to set stops in the usual way. However, setting stops is something that I must do. I cannot evade this issue. I developed a method for Recall and have applied it below for Orora.

Since I do not have a chart with which I can set stops in my normal way, I have taken a different approach that seems to be not inconsistent with my investment plan: I will work backwards from my risk rule.

The demerger has given me 8,100 Orora shares that have at this point a notional cost base of $1.16. This means that my holding notionally cost me $9,396.00.

My capital at 19 December 2013 was $2,217,194, so my holding in Orora Holdings is 0.42% of my capital.

This is immediately a problem because on my investment plan calls for a minimum investment of 2% of capital (I have invested 1% of capital in a few small companies, but Orora does not fit that criterion).

My options seem to be to either:

1. Buy more to bring my holding to 2% of capital invested 2. Sit on my holding as it is until there is enough information to bring it into my investment

plan criteria (this still leaves the issue of managing such a holding). I would also need to work out how to set stops on such a position.

3. Sell the demerged shares and wait until Orora meets my investment plan criteria in terms of available information.

In making a decision on which of these options to choose, I am cognizant that many demergers are successful.

What I have decided to do is this:

1. Continue to hold the demerged shares. 2. Set my stops that will take me out if the price falls. 3. If the price begins to clearly trend upward, consider bringing the holding to 2% of capital

invested.

That leaves the issue of how to set my stops.

If my maximum risk is 0.5% of capital on an invested 2% of capital position, then my maximum risk on a 0.42% of capital invested position would be 25% of that (0.5/2) = 0.42 x 0.25 = 0.00105% of capital.

My capital is $$2,217,194, so my maximum risk for this position would be = 2,217,194 x 0.00105 = $2,328.05.

My holding cost $9,396.00. Subtracting the maximum risk of $2,328.05, I should sell when the value of my holding falls to = 9,396 – 2,328 = $7,068.00.


I have 8,100 Orora shares, so my stop price would be = 7,068 ÷ 8,100 = $0.87.

Here is the chart showing this hard stop:

Calculate position size Not applicable.

I am holding 8,100 Orora shares that have a cost base of $1.16 and my hard stop is at $0.87.

18 19 20 23 24 25 26 27 30 31DEC 2013

1 2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 27 28 29 30JAN 2014

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Managing the investment

Updated to 28 January 2014 I now have some price history, albeit very short-term. This is how the daily chart looked at the close of 24 January 2014:

This looks as though the initial sell-off by Amcor shareholders who did not wish to hold Orora has happened and a short-term upward trend is unfolding.

I now have somewhere to place my stops based on the chart. The low of the decline in January was $1.115, so my soft stop is one minimum bid lower at $1.11 and my hard stop is 2% below that at $1.09. This chart shows my stop:

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC2013

JAN FEB2014

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JAN FEB2014

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Now that I have a better chart-based stop, albeit not precisely my investment plan because of the lack of trading history, I feel that I am justified in bringing my holding up to 2% of capital. This is my position size calculation:

I already own 8,100 shares from the demerger. Because the demerged shares have a cost base of $1.16, less than my estimated buying price, I have calculated how many shares to buy like this:

If I did not own any, I would invest 33,130 x $1.35 = $44,725.50

My existing holding has a total cost of $8,100 x $1.16 = $9,396

So, I need to invest a further $44,725.50 - $9,396 = $35,329.50

At my estimated purchase price, this means that I should buy $35,329.50 ÷ $1.35 = 26,170 shares

On Tuesday 28 January 2014, I bought 26,170 shares at $1.30.

Position size 1st trancheTotal Capital 2,236,266

Buy Price 1.350Hard Sell-Stop 1.090Risk 0.260

% Capital to Invest 2Position it buys 33,130

Max % Capital to Risk 0.5Maximum Position 43,005

Position allowed 33,130

% capital at risk 0.39

% capital invested 2.00


Updated to 9 April 2014 Since my last update, Orora has made a new high confirming the unfolding of an uptrend:

This enables me to raise my stops:

Low price used to base stops $1.235 Soft stop (one minimum bid lower) $1.23 Hard stop (2% below soft stop) $1.205 I am beta testing a new version of Insight Trader, which once released, will enable the soft stop to be shown with a red dashed line as shown on the chart below:

JFMAMJ J ASOND2009

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1.60W @ W 201213-110414 ORA - ORORA LTD > -0.7% -0.01 to 1.39

JFMAMJ J ASOND2009

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1.60W @ W 201213-110414 ORA - ORORA LTD > -0.7% -0.01 to 1.39


Updated to 5 September 2014 Since the last review, Orora has announced its FY 2014 profits and the price moved higher:

There is still less than a year of trading in Orora shares, so there is not a lot to go on in placing stops. I have been reluctant to move stops up quickly based on such a short-term picture. However, the spike higher two weeks ago has held so far and I have decided to bring my stops up under the last minor trough in the trend, marked with a red arrow on the above chart.

Low price used to base stops $1.37 Soft stop (one minimum bid lower) $1.365 Hard stop (2% below soft stop) $1.335

This is how the new stops look on the Orora charts:

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1.80MOV AVS 12(0) mnth 0. M @ M 311213-300914 ORA - ORORA LTD > +0.6% +0.01 to 1.725

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1.80MOV AVS 12(0) mnth 0. M @ M 311213-300914 ORA - ORORA LTD > +0.6% +0.01 to 1.725

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1.80W @ W 201213-050914 ORA - ORORA LTD > +0.6% +0.01 to 1.725


Updated to 11 January 2015 Orora had announced its first full year earnings report on 25 August 2014, which was just before the last update when I raised my stops. I did not consider the profit report at the time for two reasons. First, my primary focus was to raise my stops. Second, the earnings report was problematical from an analysis point of view as is best explained in this note to the Orora accounts (I have highlighted in red the key parts of this detailed explanation):

Effective 17 December 2013, Orora Limited (the Company) and its controlled entities (collectively referred to as the Orora Group) demerged from Amcor Limited. The Company was listed as a separate standalone entity on the Australian Securities Exchange (ASX) on 18 December 2013 and the demerger was implemented on 31 December 2013.

Prior to the demerger, the Company and Amcor Limited were required to undertake an internal corporate restructure (Corporate Restructure). As a result of the Corporate Restructure, during the financial year certain flexible packaging assets and businesses were sold and several entities ceased to be, and several entities became, subsidiaries of the Company. In addition, a number of operating assets and liabilities were legally transferred between the Orora Group and entities within the Amcor Limited Group. The Corporate Restructure took place as at 31 October 2014.

As required for statutory reporting purposes, the statutory financial information for the Orora Group has been presented for the financial year ended 30 June 2014 and for the comparative financial year ended 30 June 2013. However, as a result of the Corporate Restructure, the statutory financial information does not give a view of the performance of the Orora Group as it is currently structured.

In this regard, the Orora Group statutory financial information includes the results of certain Amcor Limited flexible packaging entities, assets and business for the period 1 July 2012 to 31 October 2013, being the date that they ceased to be part of the Orora Group under the Corporate Restructure, as well as internal and external borrowings of the Company in the period from 1 July 2013 and up to immediately prior to the demerger, that were retained by Amcor Limited post the demerger. The statutory financial information only includes the results of the Orora Group’s current businesses in North America and certain beverage closures and fibre activities in the Australia and New Zealand region for the period from 1 November 2013, the date at which these operations became part of the Orora Group under the Corporate Restructure.

To assist shareholders in their understanding of the Orora Group’s business as it is now structured, pro forma financial information for the years ended 30 June 2014 and 2013 [has been] … prepared on the basis that the business as it is now structured was in effect for the period 1 July 2012 to 30 June 2014. In the preparation of the pro forma financial information, adjustments have been made to the Orora Group’s results, …, to present a view of performance as if the Corporate Restructure had been effective from 1 July 2012. Additional adjustments have also been made in the presentation of pro forma financial information to reflect changes in operating and corporate costs associated with Orora Limited becoming a standalone listed entity as if those costs had been incurred from 1 July 2012.


The pro-forma financial information is not complete accounts, which has meant that some of my usual analysis is not possible below. Moreover, as there is information for only two years, trend indications are limited.

As an aside for readers, this situation and analysis has been difficult and time-consuming to understand. The temptation was always to avoid it because it was difficult. However, I have found it a rewarding learning experience. I believe that it has also formed a useful platform from which to build as further statutory half-yearly reports are released.

Business Performance

Operating Revenue

The increase in operating revenue was 7.9%.

NPAT

The increase in NPAT was 44.8%.

EBITDA and Cash Flow

EBITDA increased 18.4%, while Operating Cash Flow increased 32.7%, which is healthy. Free cash flow increased only 23.8%, reflecting increased capex.


Earnings and Dividend Quality

EPS increased in line with NPAT. The payout ratio is not unduly high.

The dividend was unfranked, as expected.

Financial Risk Financial risk is one of the main risks we have to manage in investing – is the business soundly financed. I start with the working capital ratios, which focus on liquidity.

Working Capital Ratios No data was provided on working capital. However, a ratio was provided: Average working capital to sales% (Average net working capital for the period/annualised sales):

FY 2013 11.0

FY 2014 10.6

which indicates an improvement in working capital management.

Debt Ratios The other important element in assessing whether a business is conservatively and soundly financed is to examine the debt ratios. I calculated a number of debt ratios below.

Debt to Equity and Gearing

Orora is in a cyclical industry, so would prefer these ratios were a bit lower. However, they have been reduced in the last year which is a move in the right direction


Net Interest Cover The other really important debt ratio is interest cover. Interest cover shows the number of times earnings before interest and tax cover interest expenses.

Net interest cover is healthy and has increased in the last year.

Debt to EBITDA Debt to EBITDA shows how many years of operating earnings would be needed to repay debt.

At just over two times EBITDA, this ratio also looks safe.

Debt to Free Cash Flow Debt to Free Cash Flow shows how many years of free cash flow would be needed to repay debt.

This ratio is also moving in the right direction.


Profitability Since, as an investor, I have bought part ownership of the business, I need to ensure that the business is operating profitably.

Profit Margins

Both margins have improved last year.

Return on Assets

Return on assets looks satisfactory and has improved.

Return on Equity and Invested Capital

My cost of capital 12.5% My hurdle rate for ROE 15% Orora latest ROE 7.6% Recent trend in ROE Rising There are two concerns here:

First, if ROIC is greater than ROE, then use of debt is detracting from return on equity. This need to be addressed going forward.


Second, if ROE is less than my cost of capital, then the company is burning capital. It is likely that the Orora ROE is also less than its WACC. On the plus side, Orora has inherited a situation and in the last year the ROE has improved.

Liquidity Risk Liquidity of the market for the stock is a significant risk to be managed in investing.

Orora is very liquid.

Price Relative to Value This is now the key question, which goes to the heart of investing with a margin of safety. If we buy a stock at too high a price relative to value, then the strategy is basically one of having to find an even greater fool down the track to sell to at a profit. Moreover, buying at a high price relative to value increases the risk that if something goes wrong, a stock priced to perfection can fall very sharply as the market re-rates its prospects.

So, at the centre of the idea of a margin of safety is to buy at a price that is low relative to value. Price is easy to define, but value is more difficult. There are many approaches to value, but in the end many are relative and it seems that a good approach is to have several different measures. If they all look OK, then we probably have a margin of safety.

Below is my margin of safety (value) checklist. In the top section, one column expresses the various metrics as multiples, which are commonly used in the industry, and the other column as yields, which in some ways make the comparisons easier in terms of return.

Notwithstanding that the price is trending upward, Orora looks too expensive to warrant building my position at this stage. Moreover, its ROE, though rising, is also below my cost of capital.

LiquidityMarket Capitalisation $2.48 BilAv traded daily last month $6.5 Mil

StockCurrent Price: $2.06

All Ordinaries Av P/E ratio 15.25 6.56%

Growth model10-year Govt. Bond x 1.5 23.72 4.22%

Value model10-year Govt. Bond x 2 17.79 5.62%

Stock P/E ratio 26.48 3.78%

Stock EV/EBITDA 8.1 12.36%

Stock EV/ Free Cash Flow 16.5 6.06%

Dividend Yield Stock All Ords AvDividend Yield 2.91% 4.52%Franking 0% 80%Grossed up Dividend Yield 2.91% 6.07%

Orora


By the end of September 2014, the Orora stock price has eased back a bit:

A month later, at the end of October 2014, the correction had completed and Orora had retested the high for the trend:

November 2014 saw a move to a new high and consolidation above the previous trading range:

DEC2013

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV2014

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DEC2013


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December 2014 saw a further advance in the upward trend:

By the 9 January 2014, the price has risen further:

DEC2013


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DEC2013


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2.20EXP MOV AVS 52(0) week 1.5722 W @ W 201213-301214 ORA - ORORA LTD > +3.5% +0.07 to 2.06


Reviewing this chart, there seems to be a case on my investment plan to raise my stops slightly to under the low of the trough formed in October 2014:


This is how the new stops look on the chart:

DEC2013


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Updated to 30 January 2015 When I last updated this journal, Orora was making new highs in a strong trend. Since then it has continued the strong rise and at the end of January 2015 the chart looks like this:

Some members have asked why I have not bought more Orora. The update to 11 January 2015 explained my thinking and that situation has not changed. The half-year report this month may change my thinking, let us wait and see.

So, there has been no cause to raise my stops. I do not want to buy more. I continue to watch developments.

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2.40EXP MOV AVS 12(0) mnth 1.6651 M @ M 311213-300115 ORA - ORORA LTD > +1.4% +0.03 to 2.13

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Updated to 16 March 2015 February 2015 saw a moderate correction leading up to the announcement of the half-year 2015 earnings report on 24 February 2015. The price then broke sharply to a new high and has been trading sideways since:

I think I am warranted in regarding the February correction as a higher trough in the trend and have raised my stops under the low of that trough:


This is how the new stops look on the chart:

JFMAMJ J ASOND2010

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2.60EXP MOV AVS 52(0) week 1.7825 W @ W 201213-200315 ORA - ORORA LTD > -2.1% -0.05 to 2.32

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2.60EXP MOV AVS 12(0) mnth 1.8446 M @ M 311213-310315 ORA - ORORA LTD > -2.1% -0.05 to 2.32


Next, I need to review the performance of the business, notwithstanding that there is not much data available to see meaningful trends.

Financial Risk and Liquidity

Working Capital

These ratios are steady at what seems a safe level.

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Days stock held has jumped, but does not look high for this kind of business. The comparison may not be very valid in that 2014 may have been unusually low.

These ratios are basically steady and look fine for this kind of business.

Debt and Equity

The debt ratios are steady. They look quite reasonable for this kind of business.

However, interest cover is not strong, though it has improved a bit in the last period.

0

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Days Receivables Days Payables

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net Interest Cover (times)


Debt to EBITDA is quite low and reasonable. However, debt to free cash flow looks high, though has been reduced.

Profitability

Trend of Sales and Earnings

The sales revenue has increased, though the scaling here makes it look better than it is.

Statutory profit has increased strongly.


EBITDA and the cash flow measures have also shown an increase.

Level and Trend of Profit Margins

Margins have strengthened in the most recent period.

Shareholder Return

Return on equity is well short of my cost of capital, however it has increased strongly. Debt contributes to shareholder return.


Earnings per share have increased nicely. Dividend growth was subdued, reducing the payout ratio, which was on the high side. The full-year dividend will be more revealing here.

Margin of Safety: Price versus Value

Orora looks expensive now, though I bought it at lower prices. The dividend yield may be increased when the final dividend for the year is declared.

In conclusion, I am happy to continue holding Orora, but do not see a strong case to increase my position at this time. My main concern is to see the return on assets and return on equity improved.

0

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EPS ¢ DPS ¢

Ratios YieldsChart Model ValueMarket-based Criteria10-year Govt. BondPrice/Coupon 0.00 Coupon/Price x

All Ordinaries AveragePrice/Earnings 15.45 Earnings/Price 6.47%

Data for OroraMarket Price $2.31

Price/Earnings 23.37 Earnings/Price 4.28%

EV/EBITDA 11.7 EBITDA/EV 8.53%

EV/ Free Cash Flow 37.0 Free Cash Flow/EV 2.71%

My Plan StockCost of Capital 12.5% Return on Equity 7.50%My Hurdle Rate 15.0% Recent ROE trend rising

All Ords Av StockDividend/Price 5.32% 2.83%Grossed up Dividend Yield

Margin of Safety - Price versus Value

Return on Equity v Cost of Capital


Updated to 1 April 2015 Since the last review two weeks ago, the Orora share price seems to be starting to form a sideways consolidation pattern:

As discussed at the last review, my stops are in the right place on my investment plan and I am not inclined to increase my holding, so no action at this time.

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Updated to 12 May 2015 Since my last review of Orora, The share price completed the sideways pattern, but then fell somewhat towards my stops, before rallying slightly:

There has not been any significant news from Orora in recent times. AMP has both bought and sold shares in significant quantities in April and Perpetual has been steadily increasing its holdings.

The price remains above my stops, which seem to be in the right place. There is nothing to prompt me to take any action at this time. I considered buying more, but Orora looks expensive to me even at the reduced price.

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Updated to 19 June 2015 Since the last update there have been no significant news announcements for Orora. However, the share price has been slipping lower. On Thursday 19 June 2015, the price spiked down though my soft stop, but not my hard stop:

Notice that the price closed that day well above my soft stop. I chose not to react to that spike. On Friday 19 June 2015, the price moved strongly higher. This provides an interesting lesson in the advantage of having a soft stop, which if violated allows my discretion unless the hard stop is also violated, in which case I must sell. That the price closed above my soft stop was an interesting observation, but not critical to my investment plan. For example, if the price had spiked through my hard stop and then closed above it, I would still be bound to sell on my investment plan.

This is how the charts look in my time frame at the close on Friday 19 June 2015:

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2.60D @ D 230614-190615 ORA - ORORA LTD > +5.5% +0.11 to 2.12

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JFMAMJ J ASOND2010

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Updated to 31 July 2015 Since the last review, Orora has announced that it raised additional debt on the US private placement market:

Orora has also announced the conditional sale of a former carton board mill site:

After threatening my stops at the last review, Orora’s share price has strengthened. It has recently bounced strongly higher, suggesting that my stops were a support level and that it had held above it successfully.

Notwithstanding that Orora is due to report on 26 August 2015, I decided to build my position further from 2% to 4% of capital invested on this show of strength in the trend. This was my position size calculation:

So, I would now be risking 0.84% of capital back to my hard stop on the newly enlarged position.

On 31 July 2015, I bought 21,940 shares at $2.32.

Position size 1st tranche 2nd trancheTotal Capital 2,236,266 2,545,514

Buy Price 1.350 2.320Hard Sell-Stop 1.090 1.930Risk 0.260 0.390

% Capital to Invest 2 2Position it buys 33,130 21,944

Max % Capital to Risk 0.5 0.5Maximum Position 43,005 32,635

Position allowed 33,130 21,940

Total % capital at risk 0.39 0.34Cumulative % capital at risk 0.84


This was the share price chart as at the close of 30 July 2015:

I recognise that I had judged Orora to be fully-priced back in March (at around the current price) and was then reluctant to increase my holding. I might well have awaited the full-year report due on 26 August 2015. My change of mind is driven by two things:

1. I am taking advantage of general market weakness to build my portfolio (I have recently built my holdings in three other stocks). I have sold down my cash reserve held in holdings in LICs as necessary to do this.

2. There is some evidence that demergers see improved management of the demerged company. This is yet to come through in results so soon after this demerger. This particular case has an added kicker in Orora’s US business, which should benefit the bottom line from weakness in the Australian dollar.

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Updated to 31 August 2015 Since my last update, Orora has announced it full year 2015 earnings report.

The news release included some commentary on operational performance for the year:

Orora also announced a new acquisition:


The media release highlighted the EBIT margin increases:

Australasia:

North America:

I have now updated my analysis of Orora to include the latest report:


Operating revenue is increasing.


Statutory profit more so.

EBITDA and cash flow have also increased.

Financial Risk and Liquidity

Working Capital

Both ratios have strengthened slightly.


However inventory days have blown out so will need watching, though two periods is a limited observation.

Orora is paying and collecting trade debts more quickly.

Debt and Equity

No significant change here.


However, interest cover has strengthened (it was low at 3 times).

Debt to EBITDA has improved slightly, but debt to Free Cash Flow has improved dramatically because Free Cash Flow has increased strongly.

Profitability


Both gross and net margins have improved.


Shareholder Return

Return on equity has increased. Debt is contributing to that return.

Earnings per share are higher and the dividend has been increased.

Free cash flow cover for the dividend has increased.


Margin of Safety: Price versus Value

Orora still looks a bit expensive, but a bit less so than at the half-year.

I like to see the return on equity increasing. It is moving towards my cost of capital.

Underlying it has been the increase in profit margins.

The dividend yield is still low, but is improving.

Market Liquidity

Orora is a liquid stock for my portfolio size.

Ratios YieldsChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.63 Earnings yield 6.84%


Price/Earnings 21.02 Earnings yield 4.76%

EV/EBITDA 10.4 EBITDA yield 9.65%


My Cost of Capital 12.5%Return on Equity 9.1%Recent ROE trend rising


All Ordinaries index Average 6.26%Orora 3.53%

Grossed up Dividend Yield

Market LiquidityMarket Capitalisation $m 2,739Av Buy/sell spread % 0.6Annual Turnover % 74.2Annual Turnover $m 2,032Av trade/day last year $000 8,129Av trade/day last 20 days $000 5,459Top 20 Ownership % 77.8


Chart Analysis

In the last month we have seen a significant market correction. While Orora’s share price fell in this period, it remained in the range it has been in for some time:

My stops seem to be in the right place. They have been successfully tested twice now.

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JFMAMJ J ASOND2010

JFMAMJ J ASOND2011

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Updated to 6 October 2015 There have not been any news announcements since my last review other than the publication of the annual report.

I have been looking to increase my holding in Orora. On 6 October 2015, in a strong market, the share price moved to a new high:

I decided to invest a further 2% or capital, building my position to 6%. This was my position size calculation:

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JFMAMJ J ASOND2010

JFMAMJ J ASOND2011

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In the entire investment of 6% of capital, I was risking 1.49% of capital – my maximum risk.

On 6 October 2015 I bought 20,050 shares at $2.42.

Position size 1st tranche 2nd tranche 3rd trancheTotal Capital 2,236,266 2,545,514 2,415,745

Buy Price 1.350 2.320 2.410Hard Sell-Stop 1.090 1.930 1.930Risk 0.260 0.390 0.480

% Capital to Invest 2 2 2Position it buys 33,130 21,944 20,048

Max % Capital to Risk 0.5 0.5 0.5Maximum Position 43,005 32,635 25,164

Position allowed 33,130 21,940 20,050

% capital at risk this tranche 0.39 0.34 0.40Cumulative % capital at risk 0.84 1.49% capital invested 2.00 2.00 2.00


Updated to 2 December 2015 Since the last update, the company has held its Annual General Meeting. Some useful slides from the Managing Director’s presentation:


It is well worth reading the full text of his presentation which is on the ASX website.

The share price has been essentially flat in the face of heavy selling by Perpetual:


There is no action necessary on my investment plan at this time.

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Updated to 1 February 2016 There have been no news announcements for Orora since my last update.

The share price has continued to build a sideways pattern:

My stops are under the sideways pattern.

No action is called for on my investment plan at this point.

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JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

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J FMAMJ J A SOND2016

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Updated to 22 March 2016 Since the last update Orora have announced their interim results:


The following is my updated analysis of their results. Note that the 2016 flow data have been annualised.


Sales growth was more subdued in the most recent 12 months.


Likewise statutory profit.

EBITDA increased only marginally.

Operating cash flow growth also was more subdued in the last 12 months.


Free cash flow increased more or less in line with statutory profit.

Financial Risk

Working Capital

No problems here.

After blowing out last year, days stock have stabilised.


Receivables are well under control

No sign of stress here.

Days cash conversion has stabilised after blowing out last year.

0

20

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Days Payables


Likewise, Days working capital.

Cost of doing business has been stabilised at the lower 2015 level.

Debt and Equity

Leverage has been reduced slightly net of acquisitions and sale of land.


Debt to EBITDA is now under two times, which is sound.

Net interest cover is the key ratio and it has strengthened again.

Profitability


Both gross and net margins have improved, though the rate of growth has slowed.


Shareholder Return

All the return ratios have improved. Use of debt contributes to return on equity.

Earnings and dividends per share have increased nicely.

The payout ratio has stabilised at 70%.


The increasing dividend is well covered by rising free cash flow.

Summary: Price versus Value and Returns

Orora is no cheap, but neither is it overly expensive at current prices.

Return on equity is below my required rate of return, but is rising toward it.

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.93


Price/Earnings 20.21

EV/EBITDA 10.7





The partly franked dividend is rather less than the opportunity cost yield, but my effective yield is quite attractive.

Market Liquidity

Orora is a mid-cap stock and very liquid for my account size.

Timing and Risk Management

Chart Analysis

Since the last review, Orora’s share price has surged to a new high:


My Average Cost $ 1.87Dividend per share $ 0.085Effective yield 6.49%



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Set Stops

It could be argued that I should sneak my stops up under the last trough low in the 2015-16 sideways pattern, but I believe they are still in the correct place on my investment plan.

On 1 March 2016, Orora announced the acquisition of IntegraColor at a not unreasonable EBITDA multiple:

JFMAMJ J ASOND2011

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The following informative slides are from the investor presentation:


Updated to 21 July 2016 It has been some time since I reviewed this journal, in part because of the extensive time spent travelling overseas.

Early in May 2016 Orora made a presentation at a Macquarie Conference. Some slides that add perspective on the business:


In mid-May 2016 the company announced a Memorandum of Understanding with a major supplier of anti-counterfeit technology:


Since the last review, the share price has moved ahead strongly:

Although it is only a minor tweak, I have moved my stops up under the December 2015 low:


This is how the new stops look on the weekly chart:

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The price is well above these stops, however, I can at any time re-assess the situation in the context of my other sell signals if the situation were to deteriorate markedly.

Orora is due to announce its full-year earnings report on 15 August 2016.

JFMAMJ J ASOND2011

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Updated to 17 August 2016 Since the last review, Orora has announced its full year earnings report. My analysis follows:

Note 2014 data is shown, but I believe it is not strictly comparable to the last two years.


Operating revenue has advanced 13%.

Statutory profit is up 28.3%

Underlying earnings are up 20%


Operating cash flow is also up 20%, though it is still somewhat less than EBITDA, with cash conversion steady at 76%.

Free cash flow is up 44%.

Financial Risk

Working Capital

Working capital liquidity is stable.


A slight improvement here

Stable situation

Stable situation


A slight improvement

Stable situation

Stable situation


Debt and Equity

Very little change

Further reduction in leverage

This measure is looking better now.


Interest cover has strengthened.

Profitability


Margins have improved.

Shareholder Return

Improving return on assets


And on equity, with debt contributing to ROE

Increasing trend here

Stable payout ratio


Dividend well covered by free cash flow


Orora is no longer as cheap as it was.

Return on equity is up again and approaching my cost of capital.




EV/EBITDA 11.1





Dividend yield is below the market average, but strong on my cost.

Market Liquidity

Orora is a quite liquid stock.

Timing and Capital Preservation

Chart Analysis

Since the earnings report the share price has moved up strongly:





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3.003.20EXP MOV AVS 12(0) mnth 2.5806

M @ M 311213-310816 ORA - ORORA LTD > -3.8% -0.12 to 3.04


I am tempted to move my stops up, but am not confident that the trough before last is sufficiently substantial. I will leave the stops where they are pending further price development.

Orora made the following outlook statement in their report:

JFMAMJ J ASOND2011

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3.003.20EXP MOV AVS 52(0) week 2.5023

W @ W 201213-190816 ORA - ORORA LTD > -3.8% -0.12 to 3.04


Updated to 23 November 2016 Some extracts from the Annual Report that will update understanding of the business:


Orora made this announcement on 7 November 2016:


After a sustained upward trend, the share price has corrected somewhat:

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3.003.20EXP MOV AVS 12(0) mnth 2.7212

M @ M 311213-301116 ORA - ORORA LTD > +0.7% +0.02 to 2.78


Although my stops are some distance from the current price, there is no case on my investment plan to raise them at this time.

JFMAMJ J ASOND2011

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3.003.20EXP MOV AVS 52(0) week 2.6926

W @ W 201213-251116 ORA - ORORA LTD > +0.7% +0.02 to 2.78


Updated to 3 March 2017 On 15 December 2016 Orora announced the acquisition of the Register Print Group in the US:

On 15 February 2017 Orora announced its interim results. Some slides from the investor presentation:


My analysis of the interim report follows. 2017 interim flow data have been annualised.


Sales growth has slowed in the most recent period.


As has gross profit.

And statutory profit.

Operating cash flow advanced more strongly.


Free cash flow declined due to higher capex.

Financial Risk

Working Capital

Working capital liquidity improved.

Inventory remains well under control.


Credit control is stable.

Trade debts are being paid slightly more slowly.

Debt and Equity

Debt has increase slightly with recent acquisitions, but the absolute level is fine.


Interest cover is strong and increased again.

The leverage ratio looks fine.

Debt to free cash flow has worsened again, but is not yet a worry.


Profitability


Margins are steady.

Shareholder Return

Return on assets weakened slightly.


Return on equity is stable and use of debt contributes to it. However, return on equity is still below my cost of capital. I am hoping for further improvement going forward.

EPS and DPS crept up slightly in the last period.

The payout ratio is stable at 70%.

The dividend is still well covered by free cash flow.



Orora is now looking a little expensive considering the low growth in the most recent period.

As already noted, return on equity has stalled below my cost of capital.

Orora is now showing a lower than market yield on the current price, but is still attractive on my cost.

Market Liquidity




EV/EBITDA 10.6


My Cost of Capital 12.5%Return on Equity 11.3%Recent ROE trend stable






Orora is a mid-cap with strong liquidity.


Chart Analysis


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3.003.20EXP MOV AVS 12(0) mnth 2.8303

M @ M 311213-310317 ORA - ORORA LTD > Steady 2.97


Orora has been trending upward strongly since the demerger. That said, recently the price growth has slowed and the recent interim results explain that.

Set Stops

I have decided to move my stops up under the mid-2016 trough. However, I may act on a fall below the late-2016 trough, which is one of my alternative sell signals.


Here is how the new stops look on the chart:

J FMAMJ J ASOND2012

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3.003.20EXP MOV AVS 52(0) week 2.8032

W @ W 201213-030317 ORA - ORORA LTD > Steady 2.97

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3.003.20EXP MOV AVS 12(0) mnth 2.8303



J FMAMJ J ASOND2012

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3.003.20EXP MOV AVS 52(0) week 2.8032



Updated to 4 May 2017 On 4 May 2017 Orora published their presentation to the Macquarie Conference. Some informative slides:


Orora included a statement that confirmed its half-year guidance:

Around this and the Pact Group Holdings presentations there has been some volatility in the share price this week:


This has not so far threatened my stops.

There is a significant higher trough on the chart, but so far it has not been followed by a higher peak such as would allow me to raise my stops on my investment plan. However, a clear fall below the later 2016 low would prompt me to consider whether one of my alternative sell signals had been formed.

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3.003.20EXP MOV AVS 12(0) mnth 2.8556

M @ M 311213-310517 ORA - ORORA LTD > -1.7% -0.05 to 2.85

J FMAMJ J ASOND2012

JFMAMJ J ASOND2013

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3.003.20EXP MOV AVS 52(0) week 2.8423

W @ W 201213-050517 ORA - ORORA LTD > -1.7% -0.05 to 2.85


Updated to 14 August 2017 Since the last update Orora have announced their full-year results. My analysis of the results follows:


Sales growth has slowed slightly in FY 2017.

Likewise EBITDA

Statutory profit increase also slowed somewhat


As did operating cash flow

Free cash flow was subdued due to higher capex

Overall, these results were to be expected in the current low growth conditions.

Financial Risk

Working Capital

Working capital liquidity tightened slightly, but this is not of concern


Inventory turnover was flat.

Receivables crept out slightly, also of no concern.

Payables crept out slightly, also of no concern.


Overall, cash conversion was flat

Days working capital was actually reduced further.

Debt and Equity

The three debt measures are essentially unchanged


Interest cover was strengthened

The leverage ratio actually strengthened slightly.

Debt to free cash flow was steady, due to the effect of higher capex


Profitability


Gross margins were flat, but net margins continued to creep up

Shareholder Return

Return on assets slipped slightly

Return on equity continued to rise, helped by use of debt.


Earnings per share and dividends per share both continued their advance.

The payout ratio is stable around 70%.

The dividend is well covered by free cash flow.



Orora appears to be fairly priced compared to the market average.

Return on equity is approaching my cost of capital

The running yield is less than the market average, but my effective yield on cost has strengthened

Market Liquidity

Orora continues to have a very liquid market




EV/EBITDA 10.3









Chart Analysis

Orora’s share price jumped on the result, but continues in a wide sideways range:

I am not inclined to raise my stops until Orora makes a clear new high above the sideways range. However, see my comments in the previous review.

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3.003.20EXP MOV AVS 12(0) mnth 2.8591


J FMAMJ J ASOND2012

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3.003.20EXP MOV AVS 52(0) week 2.8396



Updated to 27 October 2017 Since the last review, Orora’s share price has made a convincing new high:

I have decided that it is time to raise my stops under the 2017 low:


This is how the new stops look on the charts:

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3.40EXP MOV AVS 12(0) mnth 2.9776 M @ M 311213-311017 ORA - ORORA LTD > Steady 3.34

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3.40EXP MOV AVS 12(0) mnth 2.9776 M @ M 311213-311017 ORA - ORORA LTD > Steady 3.34


J FMAMJ J ASOND2012

JFMAMJ J ASOND2013

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3.40EXP MOV AVS 52(0) week 2.9552 W @ W 201213-271017 ORA - ORORA LTD > Steady 3.34


Updated to 26 February 2018 Since the last update there has not been any corporate action other than to release the half year report. My analysis is below. Flow figures for the last 6 months have been annualised.


Sales revenue is growing steadily

Likewise, gross profit


And statutory profit

Operating cash flow slipped back a bit

Likewise, free cash flow which slipped on the back of increased capex.


Financial Risk

Working Capital

Working capital liquidity looks fine.

Inventory turnover is flat.

Days receivables crept out a bit


Trade debts were collected slightly more slowly.

Debt and Equity

The debt situation looks well under control

Interest cover is strong

0.0

2.0

4.0

6.0

8.0

10.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Interest Cover (times)


The leverage ratio improved again.

Debt to free cash flow slipped a bit on the back of higher capex

Profitability


Margins have improved further


Shareholder Return

Return on assets is fairly static

Return on invested capital improved. Use of debt contributes to it.



Orora seems to be fully priced.

Return on equity strengthened a bit.

The running dividend yield is below the market average, but my effective yield on cost is good.

Market Liquidity

Market liquidity is adequate.




EV/EBITDA 10.9


My Cost of Capital 12.5%Return on Equity 12.6%Recent ROE trend up








Chart Analysis

Orora has made a marginal new high on the back of its interim report.

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J FMAMJ J ASOND2013

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Updated to 14 August 2018 The following is my analysis of the annual report.


Sales revenue continued to rise steadily.

As did gross profit

And statutory profit.


However, operating cash flow was down

Free cash flow was also down again.

Financial Risk

Working Capital

Working capital was steady both for the current ratio and the quick ratio


Inventory turnover was steady

As were receivables

Payables have drifted out somewhat


Debt and Equity

The debt measures were all unchanged.

Interest cover has increased steadily

The leverage ratio seems to be levelling out just above 1.5 times


Debt to free cash flow has weakened due to lower free cash flow.

Profitability


Margins are being maintained.

Shareholder Return

Return on assets is fairly stable


Return on equity is up and the use of debt contributes to it


The price earnings ratio is fairly steady and somewhat higher than one would like, which is to be expected for a strong stock.

Return on equity is above my cost of capital and slowly rising.




EV/EBITDA 10.8





The grossed up dividend is below the market average, but my effective yield is very satisfactory.

Market Liquidity

Orora has a liquid market in its shares.


Chart Analysis





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The stock price is trending upward steadily.

The price has moved above a sideways pattern which I can now use as a base to raise my stops:


This is how the new stops look on the charts:

J FMAMJ J ASOND2013

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JFMAMJ J ASOND2018

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Completed 22 November 2018 On 21 November 2018 Orora traded through my hard stop:

I did not see this during the day as I had not really expected it, but picked it up after the close. I sold my holding on 22 November 2018 at $3.02. Here is how the charts looked at the end of that day:

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Outcome of the investment

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J FMAMJ J ASOND2013

JFMAMJ J ASOND2014


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J FMAMJ J ASOND2017

JFMAMJ J ASOND2018

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Result of investment $ %Total sale proceeds 230,070.89less Total purchase cost 142,852.00Realised capital gain/loss 87,218.89 72plus Dividends & Franking Credits 34,193.00 28Net total return 121,411.89 100% of capital 5.43


Evaluation against investment plan

Model identification No history. Assumed to be value model based on the Amcor chart Capital invested 6% Diversification I also held Pact Group for a while Max % capital risked 1.49% just inside my guideline Liquidity Orora had a liquid market on the way in and, more important, on the way out Buy Signal N.A. Margin of safety A guess based on Amcor. I bought on the theory that demergers tend to be

profitable Position building 6% Profit-taking NA Sell-stop I acted next day on violation of my hard stop

new orora · 2019. 12. 31. · how i found this stock i acquired this stock through a demerger for...

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