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Amcor Limited

Dec 10, 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 leading global provider of packaging solutions in Western Europe, North America, Australia, New Zealand, and internationally, and operates through Amcor Rigid Plastics, Amcor Flexibles, and Other segments. The group has demonstrated a significant margin expansion over a couple of years and the latest trading update with full year earnings guidance maintained at earlier levels, the latest headwinds looked short-termed ones. With Bemis Acquisition with strong  cash  flow scenario and earnings  growth  in FY19 with lower interest  costs expected  in  the  second  half, the group aims to have free cashflow of US $ 200 - 300m with support from Flexibles and Rigid Plastics segments.

Strategic Merger of Amcor & Bemis: AMC, in early August, announced that the company would acquire Bemis, the largest supplier of flexible plastic packaging in the Americas, in an all-stock transaction that got the unanimous support of the Board of Directors of both companies. For the deal, a fixed exchange ratio of 5.1 in respect of Amcor shares for each Bemis share, was revealed; and thus Amcor and Bemis shareholders will have about 71% and 29% of interest in the combined company, respectively. The price of US $57.75 per Bemis share based on Amcor’s closing share price of A$ 15.28 on August 03, 2018, was key to the deal and represented a premium of 25% to Bemis’ closing price of US $46.31 per share as of August 02, 2018.

Amcor will thus have a comprehensive global footprint for the Flexible Packaging business. Bemis is listed in the US, where the company has strong presence and generates revenue of around US$4 billion. Globally, Bemis is operating over 50 plants across 12 countries. There will be an increase in economies of scale and resources through AMC’s leading positions in Europe, Asia and Latin America, and Bemis’ leading positions in North America and Brazil. AMC’s portfolio will benefit from increase in exposure to attractive end markets like protein and healthcare, and attractive product segments like barrier films and foils. Moreover, this merger is in line with AMC’s current trading EV/EBITDA multiple, pre cost synergies. There will be pre-tax annual cost synergies of approximately US$180 million by the end of the third year from procurement, manufacturing and G&A efficiencies, incremental to Bemis’ “Agility” improvement plan. There will be double digit returns of more than AMC’s Weighted Average Cost of Capital (WACC). Additionally, there will be enhanced liquidity given the listings on key global exchanges of the New Amcor formed (NYSE and ASX listing through CDIs). The merger will result into an expected index inclusion in the S&P 500 of the full market capitalization of the combined company (estimated at US$17 billion) and pro-rata inclusion of CDIs in the S&P / ASX 200 index, which will enhance the liquidity and considerably increase the index buying. There will also be ongoing financial strength and funding flexibility for continued investment. In addition, there will be impressive progressive dividend, which will continue to be an important aspect of the annual shareholder returns. This is because AMC will maintain an investment grade balance sheet and, with annual cash flow exceeding US$1 billion, the company will able to provide shareholders with a competitive dividend which will increase over time. There will also be immediate capacity for further investment or share buy-backs, which means additional upside that has yet not been factored in to the transaction metrics. AMC expects this transaction to close in the March 2019 quarter.


Estimated Synergies  (Source: Company Reports)

Positive Update on FY 19: In August, Amcor was encouraged on the back of early indications that the industry challenges faced by the company in the FY18 had started to stabilise or normalize and the positive signs continued through the balance of the first quarter. In the flexibles segment, there has been strong continued traction in recovering higher raw material costs and the company expected only a modest earnings impact in H1. In the Rigid Plastics business, AMC experienced modest volume growth to continue in the North American beverage end market. In emerging markets across Amcor, the company continued to see good growth in the first quarter, and continued to build on the trend that the company experienced in the second half of 2018. The Rigid Plastics business in Latin America, the flexibles business in Asia and Specialty Cartons in Eastern Europe have all experienced a strong start to the FY 19. All the cost reduction initiatives across the group are on track, and include the completion of the flexibles restructuring program and the initial stages of the rigid plastics productivity improvements.

Continuous Development to sustain leadership: Amcor has recently launched a new recycling-ready high barrier film for flexible packaging, known as ‘Amlite Heatflex’. This product has the ability to maintain performance and preserve shelf life across a wide range of ambient and high temperature, or retort, applications and it can be recycled through existing recycling streams. This new film will help the company to meet their own ambitious sustainability commitments by accelerating the move to 100% recyclable or reusable packaging. Further, to advance the development of fully recyclable packaging materials like ‘Amlite Heatflex’, the company has also recently established a Global Sustainability Center of Excellence in Europe staffed with full time resources from around the world. Finally, the company is acquiring Bemis which will bring together the two R&D leaders in AMC’S industry.

Growth opportunities in each of Amcor businesses: Across the whole Amcor, the company is experiencing both organic growth and acquisition opportunities in each of the businesses. The company is expecting substantial growth potential in four areas. These comprise of the flexible packaging in the Americas and in Asia, specialty rigid plastic containers and caps and closures. Each business is fundamentally very attractive, they are places where Amcor can be differentiated and the current position is well underweight relative to the market opportunity. All of which is expected to add up to significant growth for Amcor into the future.


Growth opportunities in Amcor business (Source: Company Reports)

Strong financial metrics and consistent margin improvement: In the last ten years, AMC’s EBIT margins have almost doubled from 7 % to around 12 %. The group thus comes at or near the top of large scale players in the packaging industry. This margin expansion means return is well above the weighted average cost of capital. This strong financial performance of the company has also been reflected in shareholder returns.

Future Outlook: AMC has reconfirmed the outlook for FY 19. In constant currency terms, the AMC’s Flexibles segment is projected to post strong PBIT growth in the FY 19 compared with PBIT of USD 835.1 million achieved in the FY18 year. This projection is based on the modest organic growth that assumes no earnings impact related to movements in raw material costs, and includes the net benefit from prior period acquisitions of approximately USD 10 million. This is after deducting costs to be incurred in the first half. Further, the forecast for FY 19 includes the incremental and final restructuring benefits related to initiatives previously announced on 9 June 2016, of approximately USD 10 million. The earnings of the Flexibles segment in the first half of the FY 19 are expected to be modestly higher than the prior year. However, this is subject to the development related to raw material cost through the remainder of the first half. Moreover, in the rigid plastics segment, AMC again expects strong PBIT growth, in constant currency terms, for fiscal 2019. Again, the earnings of the rigid plastics segment in the first half are expected to be modestly higher than the prior year. This is based on an expectation of continued modest volume growth in the second quarter. Additionally, the company expects cash generation to be strong, and the company continues to expect free cash flow to be in the range between $200 to 300 million for the FY 19.

Stock Recommendation: AMC stock has fallen 3.85% in three months as on December 07, 2018. The company is trading at a price of $13.25, and has a support at $12.7 and resistance at $13.78. AMC has a good start in FY 19, with the first quarter performance in line with the company’s expectations. Further, the company has reaffirmed the strong PBIT growth for both Rigid Plastics & Flexibles segments. AMC is experiencing both organic growth and acquisition opportunities in each of the businesses. AMC’s EBIT margins have enhanced significantly over the last 10 years and help in putting AMC at the top of the packaging industry. Forward 12 M EV/EBITDA touching single high digit and forward 12 M P/E also around 15x, suggest for an undervalued stock scenario and single digit stock price upside is expected in the medium term. The strategic & transformational merger with Bemis will create the company as clear global leader in consumer packaging. Therefore, we give a “Buy” recommendation on the stock at the current price of $ 13.25.
 
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AMC Daily Chart (Source: Thomson Reuters)



 
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