Orkla (ORKLY, Financial) is a Norwegian holding company that has been selling off shares and reinvesting in the high margin food industry. Management has disposed of several holdings over the last few years and makes a new acquisition practically every month.
Orkla has 1.02 billion shares and trades at a market cap of 83 billion Norwegian krone ($10.36 billion). It takes 8.03 krone to buy one dollar. The dividend is 2.5 krone and the dividend yield is 3.11%.
Revenues were up to 18.043 billion krone for the first six months of 2016, up 18.3% from the first six months of 2015. Ebitda was 1.813 billion krone, up 20% for the first six months. Earnings per share were 2.07 krone. If you doubled EPS, the price to earnings ratio would be less than 20. Pretty cheap for a holding company. This big jump in sales was due to so many acquisitions. The beauty of all this M&A was no share dilution.
The Foods Division is the most important and accounts for 41% of revenues. This division sells: frozen pizza, snacks, cheese, protein bars and many other products. I’d put up brand names but the average American wouldn’t recognize a single one. There are also arrangements in place with Pepsi and other food and beverage companies. The Confectionary division accounts for 16% of sales. As the name implies, this division is chocolates and other sweets. The Care division accounts for 18% of revenues. Care sells vitamins, soaps and lotions. Food Ingredients accounts for 22%. This division sells ingredients for the ice cream industry and other businesses. Ebit for the first six months was 1.842 billion krone. Rounding up for an annual number, we get 3.684 krone. At an Ebit value times ten, we get a value of 36.84 billion krone.
Sapa is a 50/50 joint venture with the Norwegian firm Hydro. Sapa sells extruded aluminum, meaning it takes aluminum and turns it into oil pans and broom sticks. For the first six months, Sapa’s revenues were 28 billion krone. I’ve always put a value on Sapa at 90% of annual sales so this would come to 25.2 billion krone.
Jotun is Orkla’s 42.5% interest in one of the largest paint producers in the world. Revenues were 10.9 billion krone for the first eight months. Rounding up, we’ll call that 13.6 billion krone. In the past, I’ve valued Jotun at one times sales at 13.6 billion krone.
The balance shows 954 million krone in cash and 5.7 billion krone in accounts receivables. The liability side shows 4.2 billion krone in accounts payables plus 11.7 billion krone in debt. Since the six month report, Orkla has issued another 2 billion krone in debt. It’s not unusual for food companies to carry a little more in debt as cash flows are usually stable.
A hydroelectric division produced 359 krone sales in the first half. Ebit was 97 million krone, so we’ll call it 196million krone annually. I’ve put a valuation of eight times Ebit so we get 1.5 billion krone. There’s 288 million krone in an investment portfolio.
So what’s a sum of the parts? There is 36.84 billion krone for Foods, 25.2 billion krone for Sapa, 13.6 billion krone for Jotun, 1.5 billion krone for hydroelectric, 288 million krone in investments, plus 6.6 billion krone in cash and receivables. Minus 25 billion krone in liabilities. So we get a sum of the parts of 83.8 billion krone ($10.4 billion).
Chris Bloomstram pegs the NAV between 70 krone and 87 krone a share. He was interviewed a while back when shares were lower. Shares are now 81.55 krone in the local currency. Bloomstram’s NAV and mine are about the same and this is where the shares are trading. We bought shares two and a half years ago and are up a little over 20%. Adding the dividend, we’re probably up 27% and that’s after Norway takes its heavy share in foreign dividend taxes. The weak krone negated the stock’s double in the home currency. I encourage you to read Bloomstram’s article. He does a nice job talking about the Norwegian economy.
I like Orkla and it’s one of my favorite holdings. I think that in a few years, it will look like a Scandinavian Kraft. If management ever lifts its 2.5 krone dividend, that will portend good things for the stock too.
Disclosure: We own shares of Orkla.
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