Sale Of Pierre Robert Group Will Simplify Future Operations

Key Takeaways

• Strategic focus on organic growth and divestment of non-core assets enhances profitability, operational efficiency, and net margins.
  
• Improved cash flow from operations reinforces balance sheet strength and potentially increases shareholder returns through higher dividends.
  
• Orkla's profitability is at risk from cost pressures, strategic repositioning challenges, and unpredictable market conditions in multiple business segments and regions.

Catalysts

Engages in branded consumer goods, and industrial and financial investment businesses.

• Orkla's transformation into an industrial investment company and its strategic focus on organic value creation in its existing portfolio could lead to improved profitability, as evidenced by the 17% EBIT growth in 2024, positively impacting earnings.
  
• The sale of non-core assets, such as the hydropower portfolio and the Pierre Robert Group, aims to reduce complexity and focus on brand and consumer-oriented investments, which can enhance operational efficiency and boost net margins.
  
• Increased investments in advertising and promotion (A&P) are aligned with the company's strategy to drive organic growth, which may contribute to revenue expansion in the coming years.
  
• The focus on cash flow improvement and working capital reduction has led to a significant increase in cash flow from operations, which strengthens the balance sheet and potentially supports higher dividend payouts, thus improving overall shareholder returns.
  
• The strategic reassessment for future growth opportunities, both organic and through mergers and acquisitions (M&A), is expected to position Orkla to capitalize on value-accretive opportunities, potentially driving long-term revenue and earnings growth.
  

Orkla Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Orkla's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 9.0% in 3 years time.
• Analysts expect earnings to reach NOK 6.9 billion (and earnings per share of NOK 7.26) by about June 2029, up from NOK 6.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK7.7 billion in earnings, and the most bearish expecting NOK5.9 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.9x on those 2029 earnings, up from 15.0x today. This future PE is lower than the current PE for the GB Food industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 1.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.65%, as per the Simply Wall St company report.

Risks

• The sale of the Pierre Robert Group was motivated by the group's weak performance and the transition of these assets might negatively impact Orkla's future earnings if the strategic repositioning fails to improve performance.
  
• Orkla Snacks faces volume pressure due to rising cocoa prices, which have been steep and volatile. Limited ability to pass on input costs in the short term could negatively impact profit margins and net earnings.
  
• Orkla Health's earnings have been pressured by increased raw material costs, such as for cod liver oil, and significant one-off costs linked to organizational changes, which might continue to impact net margins negatively in the short term.
  
• Orkla India reported organic growth challenges, further impacted by the timing of government financial incentives, which could result in uncertainty in revenue growth if these incentives become less predictable or beneficial.
  
• The projected decline in operating margins for Jotun due to increased operating costs and high inflation in some markets may impact Orkla's overall profitability and earnings if this trend continues.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK115.14 for Orkla based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK155.0, and the most bearish reporting a price target of just NOK89.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be NOK76.7 billion, earnings will come to NOK6.9 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of NOK97.95, the analyst price target of NOK115.14 is 14.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.