1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Materials||52-Week Range: $13.12 – 16.43|
|Industry: Packaging & Containers||Market Cap: A$15,936.0m|
We rate AMC as a Buy for the following reasons:
- Leading global market position, with high barriers to entry (very capital intensive).
- Attractive exposure to both developed markets and emerging markets’ growth.
- Clearly defined strategy to create shareholder value.
- Bolt-on acquisitions provide opportunity to supplement organic growth.
- Solid balance sheet.
- Leveraged to a falling AUD/USD.
- Proposed transaction with Bemis will provide significant penetration of the U.S. flexible packaging market.
We see the following key risks to our investment thesis:
- Management fail to realize the synergies proposed in the Bemis transaction.
- Competitive pressures leading to margin erosion and potential balance sheet pressure (e.g. reduced earnings leading to potential debt covenant breaches).
- Input cost pressures in which the Company is unable to pass on to customers (even though the Company does pass through input costs).
- Deterioration in global economic growth.
- Value destructive acquisition.
- Emerging markets risk.
- Adverse movements in AUD/USD.
Figure 1: AMC Revenue by Segment
Amcor (AMC) FY18 results as expected, saw heavy emphasis underlie the cost component of the business, with hefty raw material expenses (specifically in aluminium and liquids) afflicting margins across the board.
However, management note it was a time of recovery, with strategic cost initiatives tracking well and input costs being successfully passed onto customers. A restructuring plan for the highly seasonal Rigid Plastics business was also announced where we can expect “facilitated production and reduced overhead costs” in the segment which largely under-performed due to cost hikes over the period.
The Bemis acquisition was also touched upon; however information was largely reaffirmed with no material news being released on top of our prior note where we explored the details of the transaction. We maintain our Buy recommendation.
We appreciate there are a number of things on AMC’s plate right now, including the transformation acquisition of Bemis. However, we take comfort from the undemanding valuation.
- FY18 Key Results: 1. Group profit before interest & tax (PBIT) was down -0.2% (-3.3% in constant currency terms) as a result of increasing operating expenses over the period. 2. Price hikes were the main story for AMC this year, with management noting hefty raw material costs that hurt segmental margins (Group PBITDA margins down -0.4%). Pleasingly however, earnings headwinds are being anticipated to soften in regions as AMC successfully pass on these expenses and progress on their cost initiatives. 3. Full year dividend per share increased +4.7% to 45.0cps. 4. Balance sheet health remains resilient with Net Debt / PBITDA staying flat (2.7x) and the PBITDA interest cover ratio improving (7.0x).
- Raw material costs a drag on Group performance. The period saw continual hikes in raw material input prices which hurt overall Group performance. Specifically, management noted FY18 aluminium (up +19%) and liquids costs (up ~50%) being the key drags on the segments. Importantly however, looking forward management ensured investors on the conference call that they were making “good progress”, with earnings headwinds largely expected to moderate in FY19. Resins in many parts of the world (notably South America) have shown a slower rate of increase, aluminium continues to remain “stubborn”, while liquids (inks and varnishes) have similarly slowed in price rises. In the outlook, management are expecting the first half to still feel the heat from the pricing impact, before stabilizing in the second half – hence net off over FY19.
- Rigid Plastics sees restructuring. A restructuring program was announced for Rigid Plastics after the segment saw lower volumes and an adverse mix hurt performance compared to previous periods. The plan will seek to consolidate capacity into larger plants, invest more into productive assets, and reduce overhead costs. Specifically, we can expect to see investments into more effective injection machines to replace older capacity.
- More on the Bemis acquisition. No material new information on this front. In our view, the strategic rationale behind the transaction is hard to fault, with the possible asset profile bolstering AMC’s position as a global leader and cementing the Group’s presence in North America and Brazil.
NHF FY18 RESULTS SUMMARY…
Figure 3: FY18 AMC Underlying Results Summary
Source: Company; Numbers may not correctly add up due to negligible movements in ‘other’
Flexibles posted revenue growth of +4.9% compared to the pcp owing to strong sales growth in Food Europe, Global Healthcare, and Capsules. 2H18 performance improved in Flexibles Asia Pacific, helping Flexibles PBITDA improve (+3.7%) over the period. Cost impacts however, worth US$43m were borne as a result of higher raw material costs which adversely impacted PBIT by approximately ~US$35m. PBITDA margins subsequently contracted -20bps to 16.3% over the period. While the recent Alusa acquisition has brought about synergy benefits and volume growth, management have admittedly noted lower volumes and higher raw material costs offsetting these gains.
In constant currency terms, management is guiding the segment to deliver “solid PBIT growth in the 2018/19 financial year, compared with PBIT of US$835.1m”. However, we note that this figure considers no earnings impact owing to raw material costs movements, prior period acquisition benefits (~US$10m) and restructuring benefits (~US$10m).
Rigid Plastics was the underperformer over the period, impacted by both top-line contraction (-3.1%) and cost increases (+11.9%). Weak customers and market volumes hurt North American beverage (organic volumes -5% lower) and Bericap groups, while Latin America mostly flat-lined. As a result, PBITDA margins fell -80bps for the segment to 15.6% over the pcp. Management note they have begun expense initiatives to reduce structural costs, which will see the business being able to leverage higher earnings in the outlook.
Rigid Plastics is being guided to deliver “solid underlying PBIT growth in the 2018/19 financial year, compared with US$312m achieved in the 2017/18 year”. Again, this figure will be conditional on Amcor being able to achieve modest organic growth, and the Group’s ability to realise benefits from prior acquisitions (~US$5 – 10m) and restructuring initiatives (~US$5 – 10m).
Figure 4: Balance Sheet and Debt Profile
Balance sheet. Pleasingly, over the period AMC was able to moderately strengthen its balance sheet (as the Group had previously guided), reducing net debt levels and improving its interest cover ratio to 7.0x. Net financing costs of US$204.8 showed elevation over the prior period, however this largely reflected the depreciation of the USD against currencies which AMC’s borrowings are domiciled in. Net finance costs are expected to be within a US$200 – 210m range in FY19. Management are confident in their cash position and see headroom to conduct diligent capital management (in the form of dividends) and further value-accretive acquisitions.
Figure 5: Flexibles Raw Material Cost Inflation
Raw material costs. The period saw continual hikes in raw material input prices hurt overall Group performance. Specifically, management noted FY18 aluminium (up +19%) and liquids costs (up ~50%) being key drags on the segments. Importantly however, looing forward management ensured analysts on the conference call that they were making “good progress”, with earnings headwinds largely expected to moderate in FY19. Resins in many parts of the world (notably South America) have shown a slower rate of increase, aluminium continues to remain “stubborn”, while liquids (inks and varnishes) have similarly slowed in price rises. In the outlook, management are expecting the first half to continue to feel pressure from the pricing impact, before stabilizing in the second half
Figure 6: Pledge to Sustainability
Figure 7: AMC Financial Summary
Source: BTIG, Company, Bloomberg
Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.