Due to ongoing challenges, Orora's FY24 earnings forecast is lower than FY23, prompting a "sell" recommendation as ORA shares have dropped over 20% year-to-date

Following the completion of the March 2024 quarter trading period and Management’s recent review of business unit forecasts for 2H24, Orora has updated its FY24 earnings forecast. Excluding the earnings contribution from Saverglass for the seven months in FY24, Group-level earnings (EBIT) are expected to be slightly lower than in FY23. The revised Group EBIT forecast, excluding Saverglass, for FY24 is between $307 million and $317 million, compared to $320.5 million in FY23. North America (OPS) In the March 2024 quarter, OPS has continued to experience volume softness, particularly within Distribution, and the impacts of price deflation to customers. A decline in average daily sales during the February to March trading period suggests that Management does not expect the usual seasonal uplift in June 2024 quarter daily sales. Consequently, 2H24 revenue is forecast to be down approximately 3% compared to 1H24, with FY24 EBIT forecast to be between US$102 million and US$107 million, compared to US$112.6 million in FY23. While OPS remains positioned for potential improvement in the US economy, with continued investment in sales resources for the Distribution and Manufacturing businesses, current economic conditions pose significant challenges. Australasia The strong performance from Cans is expected to offset the ongoing softness in customer demand for Glass. No immediate benefit is expected in FY24 from the removal of tariffs on the export of Australian wine to China. Volume growth from exports to China is anticipated from FY25, which delays any positive impact on the current outlook. Saverglass Following the reported December 2023 EBITDA of €14.2 million (excluding AASB 16 Leases) and a similar operating performance in January 2024, weaker results in February and March confirmed no noticeable improvement in forward customer demand due to continued destocking. This leads to a reduction in forecast sales tonnage in 2H24, down approximately 11% compared to 2H23. Despite some encouraging signs of improved consumer demand in certain markets, including North America, other markets like Europe remain subdued. Volume uplift is anticipated once the destocking cycle completes, but this is now not expected in FY24. Consequently, forecast EBITDA for FY24 (seven months) has been reduced from approximately €98 million to between €84 million and €88 million. The forecast reduction in earnings for 2H24 will increase leverage to approximately 2.8x by 30 June 2024, up from approximately 2.6x on 31 December 2023. Although the Group retains strong liquidity, with over $600 million of committed undrawn liquidity and an average debt maturity of approximately 4.0 years, the outlook remains subject to global and domestic economic conditions and currency fluctuations. Year-to-date, Orora shares have been capped below $2.50 per share and have depreciated by more than 20% since the beginning of the year. Given the negative sentiment surrounding the stock and the challenging forecast, we recommend a cautious approach and suggest a "sell" on ORA for now.