Orkla A Buy On Dividend And Sum Of The Parts Valuation

Summary

• The dividend yield is 3.85%.
• The stock is trading at about half of what my sum of the parts calculation.
• Orkla is the largest foods company in Nordics.

Orkla (OTCPK:ORKLY) had a mediocre year but the stock is a buy. The dividend is 3.85% and the sum of the parts is worth way more than what the stock valuation is.

The stock trades for 67.56 krone, there are 1.02 billion shares, and the market cap is 68.9 billion krone ($8.08 billion). Earnings per share from continuing operations were 3.24 krone and the price to earnings ratio is 20.9. Earnings per share were 3.46 last year. The dividend is 2.6 krone and the dividend yield is 3.85%. That’s a nice valuation. You do have to cede back some of that dividend to the Norwegian tax man, even inside of IRAs.

Now for the hard part—I’m going to do a sum of the parts evaluation. The Foods division made 16 billion krone in revenue ($1.88 billion). Kraft/Heinz (KHC) trades at about two times sales so that would be 32 billion krone ($3.76 billion). Confectionary and Snacks made 6.2 billion krone in sales ($727 million). Hershey (HSY) trades at about three times sales so I’m going to put a valuation at 18.6 billion krone ($2.2 billion). Orkla Care made 8 billion krone in revenues ($939 million). I’m going to compare Care to Church & Dwight (CHD) which trades at about four times sales—32 billion krone ($3.7 billion). Food Ingredients made 9.65 billion krone ($1.13 billion). I’ll compare them to Hershey at three times so that comes to 29 billion ($3.4 billion). I’m going to compare Jotun to PPG (PPG) which trades at 14 times Ebit so that comes to 19.8 billion ($2.32 billion). Hydro, I guess I’ll compare to American Electric Power (AEP) which trades at 2.4 times so that puts us at 2.5 billion krone ($293 million).

My rough calculation of these businesses, cash, and receivables is 141.8 billion krone ($16.6 billion). Total liabilities are 18.4 billion krone ($2.2 billion). This roughly comes to a valuation of 123.4 billion krone ($14.5 billion). So the stock is selling at about half of what the company is worth. I’ll admit, comparing these foods businesses to U.S. based blue chips that have been around since the 19^th century might be stretching it. But still, the stock is worth way more than it is trading for.

The Polish Health division experienced a mediocre 2018. Management expects things to improve in 2019. Things went well in Sweden, Finland, and Denmark but Norwegian foods were affected by the new sugar tax. Organic growth (meaning without adding new companies acquired) was only 0.4% for foods. At least it was positive. Confectionary and snacks fell 3.4% in part because of the tax.

Operating revenues were up 3% for the year to 40.837 billion krone ($4.8 billion). Earnings before interest and taxes 3% to 4.777 billion ($560 million). Orkla receives 30% of its revenues from Norway, 38.9% from the Nordics, 4.9% Baltics, and 22.4% from Europe. Some of its brands include: Grandiosa Pizza, Kims, Nidar, Kornmo, Mollers, and hundreds more.

Orkla owns 42.6% of Jotun, one of the largest paint manufacturers in the world. Jotun manufactures decorative paints, coatings, and paint for the marine industry. If I’m reading the latest report correctly Jotun earned 1.4 billion krone ($164 million) in Ebit, about the same as last year.

Its hydroelectric division, Hyrdo, posted revenues of 1.025 billion krone ($120 million) and Ebit of 390 million ($46 million). Orkla’s holds an 85% interest in the Saudefaldene power company.

The balance sheet shows 1.9 billion krone in cash ($223 million) and 6 billion ($704 million) in receivables. The liability side shows 4.9 billion krone ($575 million) and 5.23 billion krone ($614 million) in debt. Nice balance sheet.

Stein Erik Hagen is the principal shareholder. He holds 250,000 shares, right at about 25% of the company. Basically, Orkla started off life as a Norwegian industrial company. Hagen has turned it into a foods and consumer products company.

The dividend was 2.5 krone from 2010 to 2015. Management bumped it up a dime last year to 2.60. From time to time, there is a special dividend. There was a special dividend of 5 krone in 2010 and 2016. It will probably be a few more years before the next special dividend.

We’ve owned the stock for five years and are down 6.12% from the original purchase. The krone hasn’t helped up. Counting dividends, we’re probably up 3% or so.

Orkla is a buy. Food businesses trade at high valuations. When Orkla sells of Jotun and Hydro, it will reinvest in foods. In a few years, it will completely be food and consumer products. Plus, the dividend is nice while you wait.

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Analyst’s 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.