Orkla's Stock Price Has Been Strong But Currency Headwinds Too Great

| About: Orkla ASA (ORKLY)

Summary

Orkla is a Norwegian company with food, paint, aluminum, and hydroelectric power.

The stock has been up but the Norwegian kroner has been weak.

As Orkla sells off divisions, it will buy new food companies and increase the dividend.

Orkla (OTCPK:ORKLY) is a Norwegian foods company that is trying to sell off divisions and focus efforts. The stock has risen since I first wrote about it in late 2013 but the Norwegian kroner has weakened. As the company continues to sell off divisions, management has bought new companies and will eventually raise the dividend.

The company has 1.02 billion shares and trades at a market cap of NOK69 billion ($8.05 billion). It takes 8.58 Norwegian kroner to buy one dollar. The dividend is NOK2.5 and the dividend yield is 3.7%. Earnings per share is NOK3.24 and the stock trades at a price to earnings ratio of 20.9.

Sales were NOK29.599 billion ($3.35 billion) in 2014 and grew 12.2% to NOK33.198 ($3.87 billion) in 2015. Adjusted Ebit grew from NOK3.214 billion ($375 million) in 2014 to NOK3.609 billion ($421 million) in 2015. Earnings per share, which accounts for income from joint ventures, grew from NOK1.63 in 2014 to NOK3.24. Some of this growth was due to the weak kroner.

Organic growth for following division was: Foods grew 3.9%, Confectionery and Snacks 3.5%, Health Care shrank 0.7%, and Ingredients 3.4%. Through M&A, each of these divisions grew sales which is reflected in total numbers.

Sapa, Orkla's 50/50 joint venture with Hyrdo, grew sales from NOK46.211 billion ($5.39 billion) in 2014 to NOK55.252 billion ($6.44 billion) in 2015. My guess is that Sapa will take a hit with the rest of the aluminum industry. Incidentally, there is a great series on Netflix entitles "Heavy Water" about how Hydro manufactured materials for the Germans in WWII. Hydo's plant was sabotaged by Norwegian commandos.

The paint partnership, is 42.5% owned by Orkla. Revenues grew from NOK13.171 billion ($1.54 billion) to NOK16.282 billion($1.9 billion). Operating profits were NOK2.064 billion ($240 million). My guess is that Jotun too will be affected by the global economy.

The Hydro Division which produces hydroelectric power saw Ebit fall from NOK216 million ($25.2 million) in 2014 to NOK154 million ($17.95 million) in 2015. Most certainly affected by competing power drawn from lower commodity prices.

The dividend has been NOK2.5 since 2010. There was a special dividend of NOK5 in 2010 and 2003. The dividend has grown from NOK0.19 in 1993. If history repeats itself, there will be a special dividend in two or three years. The NOK2.5 dividend ought be increased with the next few years too. It was NOK2.25 from 2007 to 2009. The dividend should be a major driver of the stock's price.

The balance sheet is very solid with NOK721 million ($84 million) in cash, NOK5.892 billion ($687 million) in accounts receivable, and NOK1.376 billion ($160 million) in shares of other companies. The liability side shows NOK8.7 billion ($1 billion) in debt and NOK3.869 billion ($451 million) in accounts payable. If I understand their accounting correctly, free cash flow was NOK2.526 billion ($295 million).

Let's do a sum of the parts valuation. In my first article on Orkla back in November 2013, I compared the Sapa division to Kaiser Aluminum (NASDAQ:KALU). Kaiser trades at about 90% of sales so I'm going to put a valuation of NOK24.9 billion ($2.9 billion) on Sapa. In an article that I wrote about a year ago, I put a valuation of one times sales on Jotun so it would be worth around NOK6.92 billion ($806 million). Taking eight times Ebit on the Hydro Division, we get NOK1.232 billion (145 million). For the Foods Division, we get NOK3.839 billion ($475 million). I will continue to value this at 13 times Ebit and we will get NOK49.9 billion ($5.82 billion). So we get a valuation of NOK82.952 billion ($9.66 billion). The Real Estate Division is worth a few billion more. We will know more from the Annual Report released next month.

The stock was about NOK45 when I first wrote about Orkla in late 2013. As of now, it's NOK67.7. It seems that Europeans have recognized the stock but currency headwinds are too great. It only took 6.25 kroner to buy one dollar in 2013 and now takes 8.58. Much of this has to do with oil, as it is a major export of Norway.

I like what management has been doing--selling off the industrial businesses and buying food companies. Every month, Orkla seems to be buying a new company somewhere in Europe. When Orkla sells off Sapa, Hydro division, and Jotun, it will have quite a bit of money on its hands. So I was right on the stock but wrong on the currency. We will hold and watch Orkla become a pure play food company and the stock should respond.

Disclosure: I am/we are long ORKLY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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