With results season just around the corner, you don’t tend to get much by way of newsflow, from company’s, indeed if you do hear from them, it’s usually a downgrade (Supercheap, SUL, being the exception to this rule earlier in the week).

With that as preamble, we are reflecting on this graph below, which is the NABCA rolling 12 month US spirits market, split into price and volume growth. You can see strong price and volume growth over 2020-early 2022, and then weakening across the back end of 2022. Revenues since have been basically all price, with no volumes.

Now ORA bought into Saverglass, the big European (so not US) high-end spirits bottlemaker, mid-last year, having spent much of the prior 6 months in due diligence.

The slide deck that accompanied the cap raise was, in our mind, very much predicated on extrapolating the kind of conditions that prevailed in early 2022, when volume and price growth were relatively evenly split. Again, note that the above is for the US, but, also note that EU economic underfootings are substantially worse than the US.

That matters to ORA, because whilst industry price growth for spirits is a good thing overall, ORA are all about the volume. After all, their product is what the booze is wrapped in, not the booze itself.

Now ORA paid a lowish multiple for SG, some ~7x EV/EBITDA, which is not high. Equally, the 10-year yield had reached north of 4% by that stage, so you certainly wouldn’t want to overpay or stretch for an asset when your cost of funding is experiencing material pressure to the upside (as in, worsening), and sitting on your hands in cash quite a reasonable counter option.

The recent-ish trading update (December 12th) certainly indicated that Saverglass was already disappointing, somewhat, at the margin. In the below, the word “broadly” is doing a lot of heavy lifting.

Does the 7x multiple reflect a) assumed high/sustained funding costs and b) assumed modest volume growth (thus weaker earnings and hence the cheaper multiple) or, is it simply an acquisition at the top of the cycle, where earnings are now mean reverting and thus it is (or will be) a disappointment, with the true through-cycle multiple proving to be quite a bit higher…

I suspect it is all of the above. ORA have managed the business well over the decade since being spun out of Amcor, with sensible bolt-on acquisitions. Saverglass was a bit bigger, a bit more ambitious (being outside their usual market) and will likely go through a somewhat more protracted customer destocking event (e.g. volume growth from the end client perspective will continue to be modest) and that means a somewhat lower earnings trajectory than the market was looking for, prior to SG being revealed as the target.

In time, that destocking will finish, volumes will recover, and the 7x multiple means that ORA probably hasn’t torched the fundamentals of the business. Indeed, in the long run SG might well wind up a reasonable enough outcome to justify the initial outlay (e.g. eventual ROE > WACC).

Given that the ORA share price immediately priced in all of the above (by dropping some 20 odd percent in short order upon exiting the cap raise trading halt) there isn’t, we think, too much downside risk, assuming that ORA mgmt recognise this risk, and prioritise cashflows and preserve the balance sheet as a result.

Thus we think we can afford to be patient. It trades on ~12x, a sizeable discount to the market PE.

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