Barron’s: Det är brist på mat och energi – Orkla har båda

By Rupert Steiner

Barron's, 29 July 2022

Food and energy are two resilient sectors as recession clouds gather—consumers have to eat, and they need fuel to cook and keep warm.

Norwegian conglomerate Orkla (ticker: ORK.Norway; ORKLY) is unusual in that it owns businesses producing both. The former industrial giant transformed itself into a consumer-goods company and earned about 37% of its 2021 revenue from its core food business making frozen pizza, sauces, and ready-to-eat meals. The Oslo-listed stock also owns legacy hydroelectric power stations.

While its margins for earnings before interest and tax, or Ebit, are being squeezed due to rising input costs—falling from a 2018 peak of 16.1% to 12.2% in 2021, according to FactSet—that should ease when economic conditions calm.

Crucially, it has an internal hedge against the rising cost of raw materials with its energy business. Orkla’s wholly owns a power plant in Sarpefossen, and has 85% interest in the Saudefaldene power company. They contribute less than 5% of 2021 revenue but have benefited from spiking fuel prices.

A second-quarter update in July showed just how much of a profit spike it gets from the arm—Ebit for the hydropower business increased to 579 million kroner ($58 million), compared with NOK112 million in the same period of 2021.

Bruno Monteyne, an analyst at Bernstein, forecasts the contribution hydroelectric will make to pretax profit will increase from NOK702 million in 2021 to NOK1 billion in 2022.

“There appears to be a misunderstanding in the market around this hydropower plant, causing Orkla to trade like any other fast-moving consumer-goods firm,” Monteyne wrote in a note. Adding that the same factors squeezing margins are also driving a “massive increase in profitability for Orkla’s hydropower plant,” softening the negative margin impact on the consumer business.

The stock has fallen 4.5% the past six months to NOK81.18, along with peers in the sector. Monteyne forecasts the stock could reach NOK85, while Joachim Huse, an analyst at Pareto Securities, predicts a 21.7% jump to NOK95.

The business has other divisions, including food ingredients, which comprises 24% of sales, and confectionery and snacks, which contributes 15%—the same amount as Care, its personal-care and household cleaning products unit. Orkla also has a 42.6% stake in Jotun, a paints and coating manufacturer.

The company employs 21,423 workers and has a market value of NOK81.6 billion. It trades at a multiple of 15.1 times this year’s expected earnings, in line with its peers.

Orkla posted adjusted Ebit of NOK6.1 billion for 2021, up from NOK5.5 billion the previous year, on sales of NOK50.2 billion in 2021, up from NOK47 billion in 2020.

In April, Nils Selte replaced Jaan Ivar Semlitsch as chief executive officer. In a statement to Barron’s, Selte said that “Orkla will continue to build on its strong brand and consumer insight,” while boosting the company’s value by establishing more autonomous businesses and making adjustments to the operating model.

“The aim is to get more out of our strong organization and asset base to increase shareholder return,” he said.

Such catalysts—new leadership that plans to give divisions more autonomy and is open to more-dynamic corporate activity—could help boost the stock.

The change “may help unlock a higher valuation by reducing non-core assets and highlighting the value in the underlying branded consumer goods,” Pareto’s Huse wrote in a note.