Amcor Limited (AMC) – BUY
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Materials||52-Week Range: A$13.12 – 16.43|
|Industry: Packaging & Containers||Market Cap: A$16,665.7m|
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.
Amcor (AMC) has announced that it will acquire Bemis (NYSE: BMS) in an all-stock US$6.8bn transaction, which is unanimously supported by the Boards of both companies. The combined group will have revenues of US$13.0bn and EBITDA of US$2.2bn. Following the transaction, AMC shareholders will own 71% and Bemis shareholders 29% of the combined company. The combined group’s primary listing will be on NYSE and secondary list on the ASX via CDIs.
Strategically, the acquisition makes sense to us, however financially it always does raise questions as to whether synergies will drive EPS accretion. Management was absolutely adamant (this is to be expected!) that synergies have been thoroughly assessed by both companies and in fact there is upside risk to this figure if revenue synergies are to be achieved.
We highly rate the management team of AMC and therefore are more inclined to give them the benefit of the doubt. The deal is EPS accretive (including synergies) but returns diluted (acquisition will not hit AMC’s stated strategy of ROFE of 15-20%).
Key transaction terms.
1. All-stock offer for BMS at a fixed exchange ratio of 5.1 shares for each existing share of BMS.
2. Both companies will merge into a newly created holding company (“New Amcor”) incorporated in the U.S. with an intended tax domicile in the UK.
3. New Amcor will be listed on the NYSE and the ASX.
4. Takeover is subject to all regulatory approvals.
5. Transaction is expected to close first quarter of 2019 calendar year.
Making sense of the bid price. According to consensus estimates, BMS FY19 EBITDA is estimated to be US$600m. This would suggest a multiple (EV/EBITDA) of 11.3x or 8.7x if you include synergies. On our estimates and guidance provided by management, the transaction is EPS accretive by 4.7% in FY19E and 8.9% in FY20E. Further, on our estimates, AMC is currently trading on a post-transaction (pro-forma basis) FY19E PE-multiple of 15.6x and 14.1x for FY20E. Interestingly, this is in line or slightly below ASX200 current trading multiples.
How bankable are the U$180m in synergies? Almost certain according to management and it would have to be, given the transaction is only EPS accretive with synergies. Management has “strong conviction” of achieving the estimated US$180m cost synergies by year 3 from procurement (40%), operations (20%) and G&A & other costs (40%). More than 70% of the synergies will be achieved by year 2. The Company will have a dedicated team in place to manage this process. Further, management noted that revenue synergies and potentially more cost-outs present upside risk to their initial estimates.
Strategic rationale unquestionable. In our view, it is hard to question the strategic rationale behind the transaction given it significantly lifts AMC’s position in flexible packaging in North America, which is an area it was significantly lagging in the past. Further, with balance sheet headroom available post acquisition, the Company will continue to look for more opportunities to invest or capital management initiatives.
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TRANSACTION FINANCIAL ANALYSIS
Using management’s guidance and consensus estimates, we estimate the transaction is EPS accretive by 4.7% in FY19E and 8.9% in FY20E.
1. Used consensus data for FY19 and FY20 for P&L inputs;
2. Synergies achieved in FY19 and FY20 in line with management’s guidance;
3. Assumed tax rate of 22% as guided by management;
4. Share count based on estimates and as guided by management; and
5. Assumes no revenue synergies.
Figure 1: AMC Revenue by Segment
Figure 3: AMC & BMS transaction – EPS accretion analysis
Source: Company, BTIG estimates, Thomson Reuters.
Figure 4: Bemis Overview
Figure 5: Combined group’s reach and product offering
Figure 6: Transaction structure
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.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
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