This packaging company’s turnaround story is in full swing

Turnaround stories have a way of sucking in investors. Company management and fund managers every year spruik how their company will be this year’s turnaround story, but as Warren Buffett once famously said “turnarounds rarely turn”.

With that in mind, investors are often best served casting a very careful eye over any potential turnaround story to make sure that all signs point to a prolonged recovery. While there are many companies on the ASX that classify as potential turnaround stories, I think Orora Ltd (ASX: ORA) is one of the most intriguing cases.

Orora was de-merged from Amcor Limited (ASX: AMC) in 2013 with a high debt load and what many considered the company’s ‘low growth’ portfolio, which consisted of the Australasian fibre and beverage packaging business and the North American packaging materials distribution business. These two oddly-matched businesses operate in extremely mature markets and have historically delivered terrific cash flow for shareholders; however the surprisingly high debt load and uncertainty about growth in the Australian market has restrained the share price.

The Australasian business currently generates around 65% of revenue, while the North American business contributes 35%. Analysts do not expect huge revenue gains to be made in coming years, as market share gains are unlikely in the mature Australian and North American markets, accordingly the big story over the next two years will be the implementation of a number of cost-out strategies.

Orora is investing in its Botany Mill recycling plant in NSW, which is expected to deliver $50 million in cost savings, while a lower Australian dollar and efficiency improvements are expected to boost earnings from $70 million in 2013 to over $120 million in 2015. This earnings growth, while not guaranteed, appears to be easily within the reach of Orora’s management and should result in a 60% boost in earnings per share and a dividend yield around 6%.

Foolish takeaway

Orora shows promise as a turnaround story as it may be able to deliver a 60% boost in earnings through only cost-out initiatives. There is the opportunity for the company to acquire smaller players in the Australian packaging industry to further boost market share and margins; however I expect investors to be drawn to the company’s solid dividend yield and defensive characteristics. Orora’s half-year results confirmed the positive momentum, with revenues rising 8% and earnings before interest and tax up 24% compared to the previous corresponding period.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned

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