Valuation of Orora Limited (ASX:ORA)
Orora’s estimated fair value is approximately AU$3.93, calculated using a two-stage Free Cash Flow to Equity model. This suggests that the company’s stock is currently undervalued at its trading price of AU$2.20, indicating a potential upside of 44% for investors.
Analysis of Current Share Price
The target price set by analysts for Orora (AU$2.40) is about 39% lower than our fair value estimate. This discrepancy underscores the various factors influencing market valuations and offers potential opportunities for savvy investors looking to capitalize on undervalued stocks.
Understanding Discounted Cash Flow (DCF) Models
To evaluate Orora as a potential investment, we employ the Discounted Cash Flow (DCF) model. This method forecasts future cash flows and discounts them back to their present value. Although the DCF method may seem complex, it essentially revolves around the idea that a dollar earned today is worth more than a dollar earned in the future.
The Two-Stage DCF Model Explained
For this analysis, we will utilize a two-stage DCF model. The first stage reflects a higher growth phase, which eventually stabilizes into a ‘steady growth’ period. We will project cash flow estimates for the next ten years, relying on analyst insights where available and extrapolating previous free cash flow where necessary.
Projecting Future Cash Flows
Our projections show that cash flows will start strong in the first few years, gradually tapering off. In the table below, you can see the estimated Levered Free Cash Flows (in millions) for the upcoming years, as well as their present values discounted at a rate of 7.1%:
2026: AU$94.0m – Present Value: AU$87.8m
2027: AU$268.0m – Present Value: AU$234m
2028: AU$245.3m – Present Value: AU$200m
2029: AU$230.0m – Present Value: AU$175m
2030: AU$222.8m – Present Value: AU$158m
2031: AU$220.3m – Present Value: AU$146m
2032: AU$220.9m – Present Value: AU$137m
2033: AU$223.5m – Present Value: AU$129m
2034: AU$227.8m – Present Value: AU$123m
2035: AU$233.2m – Present Value: AU$117m
Calculating Terminal Value
Following the ten-year cash flow forecast, we will calculate the Terminal Value using the Gordon Growth formula, based on a long-term growth rate of 3.5%. The resulting Terminal Value has been discounted back to the present, yielding a significant contribution to our total equity value of AU$4.8 billion.
Investment Considerations for Orora
When considering an investment in Orora, it is essential to keep in mind that the DCF model is one of several valuation methods. Familiarizing oneself with the assumptions and inputs, particularly the discount rate and projected cash flows, allows for more accurate investment decisions. Furthermore, exploring other factors such as industry cyclicality and potential capital requirements will provide a more comprehensive view of Orora’s future profitability.
Lastly, further analysis of the current market conditions and potential risks associated with the company can enhance your understanding of this investment opportunity.
