Orora Limited ($1.40)

ORA, based in Australia, is an under-the-radar spinoff that we believe has 75% upside. As a subsidiary of packaging conglomerate Amcor (“AMC”), ORA embarked on a transformative restructuring which led to its spinoff in late 2013.  Although ORA is a $1.7 billion market cap company, since it is just 1/7^th of the size of AMC, investors sold ORA stock upon the distribution, creating a classic spinoff opportunity. Through cost-cutting and new capacity, we believe ORA’s already strong free cash flow could meaningfully increase over the next 2 years, leading to a gradual increase in ORA’s dividend. ORA’s management team has an excellent track record of creating shareholder value and since the spinoff both the Chairman and the CEO have purchased significant amounts of stock personally. We believe that as the company executes and investors discover this hidden gem, the stock could trade for $2.00-$2.50 per share.

Business Summary

ORA is the #1 bottler of wines in Australia and New Zealand with a 55% market share, and the #1 local producer of aluminum cans for beer and soda. The company also manufactures liquor bottles and wine accessories such as labels and stoppers. ORA’s comprehensive one-stop-shop offering and its long standing customer relationships have proven to be a significant moat around its business. The company supplies both standard bottles and custom design bottles to meet the needs of key customers such as Carlton and Coca-Cola.

ORA also operates a fiber packaging business, manufacturing high quality, engaging wine boxes and 6-pack containers. ORA utilizes its fiber packaging capabilities in other sectors such as fresh produce and other food and beverage grocery products. With #1 and #2 local positions in fiber packaging servicing defensive end markets such as the food and beverage industry, ORA has a stable business and is entrenched with its key customers. The bottle, aluminum can, and fiber packaging businesses in Australia and New Zealand represent 80% of the company’s consolidated EBITDA.

The other 20% of EBITDA comes from ORA’s North American corrugated packaging and shipping products distribution businesses. This Packaging Distribution division has built strong regional brand equity through the Landsberg trade name and could potentially be more valuable to a competitor as the U.S. packaging sector continues to consolidate.

Restructuring

Over the last few years, ORA has undergone a significant reorganization. As a subsidiary within AMC, ORA embarked on a transformation to not only divest non-core businesses and shutter unnecessary capacity, but also to invest in its core operations and improve efficiency. The company has divested or closed nearly 40 of its 65 facilities in an effort to exit low profit centers such as aerosol, metal cans and plastic closures. Over the next few years, management expects further restructuring and profit opportunities, such as headcount reductions, a furnace realignment to lower energy expense and the opening of a new recycled paper mill. Many of these initiatives are already underway and investors can see meaningful progress. In total, these cost saving programs could add almost $100m in profits, resulting in 40% EBIT growth over the next 2 years.

Management

CEO Nigel Garrard has a history of value creation. Prior to ORA, he ran an Australian canned food company called SPC Ardmona (“SPC”) and grew the business through acquisitions and a successful international expansion program, before ultimately selling the company. Under Nigel’s management, SPC investors saw the stock triple in just 4 years. Additionally, since the ORA spinoff in December, Nigel has purchased $1.1m worth of stock in the open market and Chairman Christopher Roberts has bought almost $600,000 worth of stock personally in the open market. Actions speak louder than words and ORA management is putting their money where their mouth is, signaling that they believe the stock is significantly undervalued.

Valuation

After becoming a standalone entity, ORA initiated a $0.06 per share annual dividend, currently a 4.2% yield. As free cash flow ramps over the next two years, the dividend could gradually rise towards $0.10 per share. Furthermore, with each quarter of execution on its cost-cutting programs, the company’s dividend yield could contract towards 4%. We believe the stock could reach $2.00 per share next year and potentially $2.50 per share as we start looking into fiscal 2016. Looking from another angle, ORA could generate $0.15 per share in free cash flow in fiscal 2016, which is worth $2.25 per share using a 15x multiple.

With a defensive business, cost-cutting programs, and a management team that is paying dividends and bought shares personally in the open market, ORA stock offers investors a classic spinoff opportunity with significant upside and real margin of safety. The downside protection is provided by the free cash flow and management’s willingness to return it to shareholders. We also believe that if the market does not fully reward ORA shareholders with a higher stock price as progress is made and cash flow ramps, Nigel could create value the way he did at SPC – by selling the company.