Orora Ltd (ASX: ORA) is the latest Australian corporate to head to US debt markets to raise capital. Australian companies are securing cheap debt ahead of expected local monetary tightening later this year.
Orora plans to raise US$250 million ($315 million) in debt through the US private placement market.
The company has accepted bids from investors to issue notes for US$100 million with an eight-year maturity, and US$150 million with a ten-year maturity.
Funds will be used to replace outstanding drawn borrowings maturing in December 2016 and 2018.
The funds are targeted for July 2015 and will remain in US dollars, providing a natural hedge for Orora's US assets and earnings.
Earlier this month, shopping centre landlord Charter Hall Retail REIT (ASX: CQR) raised $US200 million in the US private placement market.
This followed a $US2.3 billion debt issuance by Fortescue Metal Group (ASX: FMG) and $1.3 billion debt raising by mall owner Scentre Group (ASX: SCG) in the US.
In addition to raising new capital, Orora management continues to drive restructuring initiatives, which should contribute to steady margin improvements over coming years. The company appears to be on track to achieve cost savings of AUD 20 million for fiscal 2015, and has targeted cumulative benefits of AUD 93 million during the next three years.
Lets take a look at the Orora
Orora consists of two divisions – Australasia, and packaging distribution. The Australasia business undertakes fibre and beverage packaging within Australia and New Zealand. The packaging distribution business group is located within North America, and is focused on distribution of packaging materials. The business has 36 manufacturing plants and 79 distribution sites across seven countries, and employs approximately 5,700 people.
In terms of cashflow, it appears that Orora has 'negative cashflow after investing' that is being funded by new debt. In the two years since it listed in 2013 we can see that while the company generated over $189 million in 'cashflows from operations'. Its 'cashflow from investing' was $223 million. This leaves 'cashflow after investing' of negative $33 million. The company then paid just over $36 million in dividends and received $7 million in other financing cashflows, resulting in a funding gap of negative $63 million in 2014.
To fund this gap the company increased its borrowings by $97 million. At the end of 2014 the company had $670 million in total debt and just $30 million in cash on its balance sheet. Its debt to equity ratio was just $1.53%.
So, it will be interesting to see how well management allocates this new capital and converts it into shareholder returns.
Valuation
Orora only has a short listing history, so its difficult to get a read on reliable revenue and profit numbers. Its current price at $2.14 is around the middle of its 52-week range. Its price has grown by 50% in the past 12 months, and its P/E is close to 28. For me, the share price is a little expensive but one to keep on your watch-list if you feel that management can convert new capital into solid shareholder returns.
