On Thursday, JPMorgan upgraded Orora Ltd. (ORA:AU) (OTC: ORRAF) stock, shifting its stance from Neutral to Overweight and adjusting the price target to AUD2.85, up from AUD2.40. The upgrade follows Orora's announcement of a strategic move to sell its Orora Packaging (NYSE:PKG) Solutions (OPS) division.
The sale agreement with Veritiv (NYSE:VRTV) positions OPS to change hands for A$1.775 billion on a cash and debt-free basis. The deal is anticipated to be finalized by the end of the 2024 calendar year. The transaction's valuation multiple of 9.9 times the forecasted FY24 cash EBITDA aligns with the median multiples of similar sector transactions, which stand at 9.7 times.
The proceeds from the sale are expected to significantly reduce Orora's debt. The company's net debt to EBITDA ratio, which currently stands at 2.8x, is projected to drop to 0.2x on a pro-forma basis for FY24 post-transaction.
Management has emphasized its commitment to maintaining an investment grade rating, specifically a BBB rating, and to rebalancing the company's financials in line with a global beverage packaging business. They are aiming to reach the lower end of their 2.0-2.5x net debt/EBITDA target range.
The analyst noted that the sale of OPS would likely restore balance sheet flexibility, allowing for continued organic investment in the can segment. Additionally, an improved earnings outlook is expected as the company emerges from cyclical lows in both Australasia and Saverglass. The latter is anticipated to complete destocking by early 2025, which could also contribute to a more favorable capital management potential.
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