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Amcor Limited

Oct 15, 2018

AMC
Investment Type
Large-cap
Risk Level
Action
Rec. Price ($)


 
Company Overview: Amcor Limited is a packaging company. The Company's segments include Amcor Rigid Plastics, Amcor Flexibles and Other/Investments. The Amcor Rigid Plastics segment manufactures rigid plastic containers for a range of beverage and food products, including carbonated soft drinks, water, juices, sports drinks, milk-based beverages, spirits and beer, sauces, dressings, spreads and personal care items and plastic caps for a range of applications. The Amcor Flexibles segment includes four operating segments: The Amcor Flexibles Europe, Middle East & Africa business, The Amcor Flexibles Americas business, Amcor Tobacco Packaging and Amcor Flexibles Asia Pacific. The Company's Other/Investments segment holds its equity accounted investments in the associate AMVIG Holdings Limited (AMVIG) and the joint venture Discma AG (Discma). Its products include packaging for fresh foods, such as meat, fish, bread, produce and dairy, and processed foods, such as snack foods, coffee and ready meals.
 

AMC Details

Amcor Limited (ASX: AMC) is a provider of packaging solutions in Western Europe, North America, Australia, New Zealand, and internationally; and operates through segments, namely Amcor Rigid Plastics, Amcor Flexibles, and Other/Investments segments. The manufacturer of rigid plastic containers, and flexible and film packaging has provided a decent trading update and retained its full year earnings guidance in view of the transitory FY18 headwinds and group’s strategy for emerging markets. With Bemis acquisition, the group expects strong cash flow and earnings growth in FY19. Q1 FY19 updates indicate for good traction in recovering higher costs for raw materials under Flexibles while modest volume growth is noted for Rigid plastics for North America. AMC continues to expect free cashflow of $US200-300 million while cost reduction strategy is in place. An increase (i.e., around low single digit year on year) in earnings per share in view of the PE scenario can lead to a single digit to early double digit increase in stock price in the next one year while AMC’s trailing 5 year EPS growth (CAGR) has been around 4.7%.


Leadership Position of Amcor (Source: Company Reports)

Strategic Acquisition of Bemis to become the global leader in flexible packaging space: AMC has strategically planned to acquire Bemis, which is the largest supplier of flexible plastic packaging in the Americas, in an all-stock  offer of 5.1 Amcor shares for one Bemis share, that comprise of the unanimous support of the Boards of Directors of both companies. Bemis is listed in the US and generates sales of approximately US$4 billion. Globally, Bemis has more than 50 plants with some 16,000 employees in 12 countries. This acquisition is expected to complete in the March quarter of 2019. Post-closing of the transaction, Amcor is expected to generate sales of US$13 billion, EBITDA of US$2.2 billion and annual cash flow of more than US$1 billion. Further, the acquisition will result in transforming AMC into a comprehensive global leader for the Flexible Packaging business with greater scale and resources in each key region around the world. Moreover, AMC’s portfolio will benefit from increased exposure to attractive end markets like protein and healthcare, and attractive product segments like barrier films and foils. Amcor has a leading flexible business in Europe, Asia and many parts of Latin America and with Bemis' leading positions in North America and Brazil, the company will get well placed to serve customers all over the world. Furthermore, Bemis will bring technical and material science capabilities to the combination, that generates good margins in North America. Additionally, Amcor and Bemis have identified US$180 million in cost synergies, that would have not been otherwise available to either company independently. This represents 4 to 5% of Bemis's sales. After adding synergies to the underlying EBITDA of the Amcor and Bemis businesses, the company will have higher margins and stronger growth potential. AMC will also maintain an investment grade balance sheet, will have annual cash flow exceeding US$1 billion, and will continue to provide shareholders with a competitive dividend that will increase over time. There will be a possibility of immediate capacity for further investment or share buy-backs. In addition, the all-stock transaction structure will result in shares getting listed on two major exchanges, the New York Stock Exchange (NYSE) and the Australian Securities Exchange (ASX). It is expected that approximately 70% of all New Amcor shares on issue will be listed on the ASX in the form of CDI’s with the remaining 30% of shares listed and traded on the NYSE. The total market capitalisation of the combined company will qualify for inclusion in the US S&P 500 Index and AMC will be within the top 300 largest companies in that index. Overall, the company is on track to secure the necessary regulatory approvals and to complete the documentation and US SEC registration processes.


Two Major Global Listings & Increased Index Weighting (Source: Company Reports)

Update for FY 19: FY 19 has witnessed a good start, and is in line with the company’s expectations. In the flexibles segment, the company is recovering from higher raw material costs, and expects only a modest earnings impact in H1. In the Rigid Plastics business, the company has experienced modest volume growth to continue in the North American beverage end market. Overall, the Rigid Plastics business in Latin America, the flexibles business in Asia and Specialty Cartons in Eastern Europe, have all experienced a good start in the FY 19.

Earnings in FY 18 were in line with prior year in constant currency terms: During FY 18, Profit after tax (PAT) of USD 724.0 million and Earnings per share (EPS) of 62.6 US cents were in line with last year on a constant currency basis. The company has posted strong profit before interest and tax (PBIT) margin of 11.6%. The company has delivered strong returns, measured as profit before interest and tax to average funds employed is of 19.0%. AMC’s Free cash flow, after net capital expenditure and cash restructuring is of USD 194.1 million and the company has increased full year dividend per share by 4.7% to 45.0 US cents. Moreover, in FY 18, AMC continued to implement pricing actions to recover from higher input costs in the Flexible Packaging segment and to adapt the cost base to reflect lower volumes in some parts of the business. The company has continued to make good progress against investments in the Alusa and Sonoco acquisitions and the restructuring initiatives in the Flexibles segment. Further, in FY 18, the company had completed long-term supply agreements with several multinational customers, and commissioning of new plants commenced in India and Mexico. Additionally, the company’s net debt was USD 3,872.2 million at 30 June 2018, which is USD 481.1 million lower than 31 December 2017. Net financing costs of USD 204.8 million were higher in FY 18 than the prior period, mainly driven by the depreciation of the US dollar against currencies in which borrowings have been drawn and higher floating rates in the USA.


FY 18 Financial Performance (Source: Company Reports)

FY 19 Outlook: AMC has reconfirmed the previous outlook of the company. For FY 19, in the flexibles segment, the company expects strong PBIT growth, in constant currency terms. The earnings in the first half are expected to be higher than the prior year based on current expectations for raw material costs in the second quarter. In the rigid plastics segment, AMC expects strong PBIT growth, in constant currency terms, for FY19. The earnings of this segment also in the first half are expected to be modestly higher than the prior year, which is based on an expectation of continued modest volume growth in the second quarter. Moreover, AMC expects cash generation to be strong, and expects the free cash flow to be between $200 million to $300 million for the year 2019. Growth and acquisition opportunities in each of the businesses like flexible packaging in the Americas and in Asia, specialty rigid plastic containers and caps and closures, are also expected to be witnessed. Additionally, it is expected that the earnings growth will be weighted towards the second half of 2019, due to things that comprise of the timing of restructuring and integration costs, and the interest costs are expected to be lower in the second half of the year relative to the first half.

Key Appointment: AMC has appointed Eric Roegner as President Amcor Rigid Plastics, who will succeed Mike Schmitt in this role in mid-November. Eric will be based in Ann Arbor, Michigan, in the United States.

Stocks Recommendation: Meanwhile, AMC stock has fallen 6.67% in three months as on October 12, 2018 and is trading at a P/E of 15.70x. AMC is trading at $13.19, and has support at $13.11 and resistance at $14.32. Over the past 10 years, AMC shareholders have received a significant amount of total return on their investment. The company has recently launched a new recycling-ready high barrier film for flexible packaging, known as ‘Amlite Heatflex’, which will help to meet the company’s ambitious sustainability commitments by accelerating the move to 100% recyclable or reusable packaging. In January, AMC became the first global packaging company to pledge to develop all the company’s packaging to be recyclable or reusable by 2025, to significantly enhance the use of recycled materials, and to work with others to accelerate greater recycling of packaging around the world. Further, the company plans to advance the development of fully recyclable packaging materials like ‘Amlite Heatflex’, as the company has recently established a Global Sustainability Center of Excellence in Europe.  Meanwhile, the company expects to deliver strong cash flow and constant currency earnings growth in the FY 19. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 13.190.
 

AMC Daily Chart (Source: Thomson Reuters)



 
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