Company Overview: Amcor plc is a packaging company. The Company’s segments include Flexibles and Rigid Plastics. The Company offers a range of packaging related products and services, including packaging for beverages, food, healthcare, and personal and home care, tobacco and industrial applications. The Flexibles consists of operations that manufacture flexible and film packaging in the food and beverage, medical and pharmaceutical, fresh produce, snack food, personal care and other industries. The Rigid Plastics consists of operations that manufacture rigid plastic containers for a range of predominantly beverage and food products, including carbonated soft drinks, water, juices, sports drinks, milk-based beverages, spirits and beer, sauces, dressings, spreads and personal care item and plastic caps for a variety of applications.
 

AMC Details

Strategic Acquisition with Bemis Company will Support Growth Trajectory: Amcor PLC (ASX: AMC) is a global packaging company and has two reportable segments, i.e., Flexible and Rigid Packaging. The market capitalisation of the company stood at ~A$23.82 billion as of 18 November 2019. Recently, the company reported a decent set of numbers for three months period ended 30 September 2019, wherein net sales increased by 38.8% to $3,140.7 Mn as compared to the prior corresponding period. It was mainly supported by a higher sales contribution from flexible business segment during the same period. On 11 June 2019, AMC wrapped up the acquisition of 100% of outstanding shares of Bemis Company, Inc, a US-based global manufacturer of flexible packaging products. Pursuant to transaction agreement, dated as of August 6, 2018, the outstanding share of Bemis common stock, which was issued and outstanding upon the completion of the transaction, was converted into a right to receive 5.1 ordinary shares of the company traded on NYSE. This acquisition places AMC as a global leader when it comes to consumer packaging with a comprehensive global footprint in flexible packaging along with the greater scale in primary regions of North America, Latin America, Asia Pacific as well as Europe, and with industry-leading research and development capabilities. It was further added that the acquisition made the contribution of around $970 million in the net sales and a $6 million net loss to Q1 of the fiscal year 2020 results. Net income attributable to Amcor plc witnessed a fall of $32.4 million, or 32.9%, and the figure stood at $66.0 million for three months ended September 30, 2019, on a YoY basis primarily because of Bemis related acquisition, transaction and integration cost impacts. On August 21, 2019, the company’s Board of Directors approved on-market buy-back amounting to $500 million of the ordinary shares and Chess Depositary Instruments (or CDIs). In Q1 FY20, the company repurchased around $58.2 million, or 5.8 million shares. During the three months ended September 30, 2019, the company has declared a cash dividend per ordinary share amounting to $0.12.

Over the four-year period covering FY16 to FY19, the company’s operating income witnessed a CAGR growth of 10.4%, with FY16 and FY19 operating income amounting to $589.1 million and $791.7 million, respectively. Over the same period, net-income attributable to Amcor Plc grew at a CAGR of 11.6%, with FY16 and FY19 bottom-line of $309.3 million and $430.2 million, respectively. Dividends per share (DPS) over the four-year period witnessed a CAGR growth of 13.2%, with FY16 and FY19 DPS amounting to $0.40 and $0.58, respectively, representing decent returns to its shareholders over the same period.

The expected cost synergies as a result of Bemis acquisition, strategic investments, global footprint and robust balance sheet are expected to act as tailwinds for overall growth. Additionally, the company might be supported by robust cash generation capabilities.


Four- Year Financial Summary (Source: Company Reports)

Top 10 Shareholders: The following image provides a broader overview of the top 10 shareholders in Amcor PLC:


Top 10 Shareholders (Source: Thomson Reuters)

Overview of AMC’s Margins: The company’s net margin in FY19 stood at 4.6%, while its operating margin was 8.4% during the same period. Notably, EBITDA margin of AMC stood at 15% in FY19, which is in line with the industry median of 15% and, thus, it can be said that AMC has been managing its costs as per the industry benchmarks. The company’s current ratio stood at 1.15x in FY19, which reflects an improvement from FY18 figure of 0.72x and, therefore, it can be said that AMC’s capabilities to meet its short-term obligations have improved on a YoY basis. Also, decent liquidity levels reflect that AMC has headroom to make further deployments towards strategic business activities, which can act as long-term growth catalysts. Debt/Equity ratio stood at 1.09x in FY19 as compared to FY18 figure of 7.74x and, thus, it can be said that AMC has been focusing on deleveraging of balance sheet. Lower debt/equity ratio is better for the company as it can focus on core business operations to achieve respectable growth. The company’s percentage long-term debt to total capital stood at 45.1% in FY19, which reflects a fall from FY18 figure of 48.5% and, therefore, it can be said that AMC’s exposure towards long-term debt component has reduced.


Key Ratios (Source: Thomson Reuters)

Performance of Flexibles Segment: The company’s Flexibles segment net sales, including intersegment sales, rose by $897.0 million, or 58.5%, and the figure stood at $2,430.8 million for three months to September 30, 2019, from the figure of $1,533.8 million for three months to September 30, 2018. The segment’s adjusted EBIT rose by $133.0 million, or 84.4%, and amounted to $290.5 million for three months to September 30, 2019, from $157.5 million in Q1 fiscal year 2019. However, excluding the negative currency impacts amounting to $4.2 million, a rise in EBIT for 3 months to September 30, 2019 stood at $23.1 million or 8.5%, because of plant cost improvements of 8.4%, SG&A and other cost improvements of 2.4% partially compensated by unfavorable volume contribution.

 
Flexibles Segment (Source: Company Reports)

Improvement Witnessed in Rigid Packaging Segment’s Adjusted EBIT:  The segment’s adjusted EBIT rose by $2.2 million, or 3.2%, and the figure stood at $70.5 million for three months to September 30, 2019, from $68.3 million for three months to September 30, 2018. It was further added that excluding the negative currency impacts, which amounted to $0.1 million, or (0.1%), a rise in adjusted EBIT for the three months to September 30, 2019, was $2.3 million, or 3.3%. This was because of the plant cost improvements of 6.3%, volume/price improvements of 1.6%, as well as SG&A and other cost improvements partially compensated by the unfavorable mix contribution.


Rigid Packaging Segment (Source: Company Reports)

Key Takeaways from Amcor Investor Presentation: The company stated that Bemis acquisition has been completed and base business has been performing well and the momentum is heading into 2020. There is earnings growth visibility in the near future and the company is uniquely positioned for the long term. As a result of Bemis acquisition, the company is expecting cost synergies, which might help it in improving bottom-line performance. The company stated that it is on track to deliver $180 million by the end of FY 2022. It was further added that the total cost synergy target as well as timing of benefits have been reaffirmed.


Estimated Realization (Source: Company Reports)

What to Expect from AMC Moving Forward: The company finances its business mainly with the help of cash flows, which are provided by the operating activities, borrowings from the banks and proceeds from issuances of debt and equity. AMC has provided guidance for 2020 fiscal year, and it stated that adjusted EPS (cps) in the constant currency terms is expected to be in the range of 61.0 - 64.0 cents, equating to an estimated constant currency rise of between 5 - 10%. The company’s cash flow after dividends (after cash integration costs) has been anticipated to be between $200 - $300 million. Moreover, cash integration costs are expected to be around $100 million.

For the 2020 fiscal year, the company has provided additional guidance metrics, and its general corporate expenses (in the constant currency terms) is expected to be in the range of $160 - $170 million. The company’s net interest costs in constant currency terms have been anticipated to be between $230 – $250 million. Notably, its adjusted effective tax rate might be in the ambit of 21 - 23%.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/E- Based Valuation


P/E- Based Valuation (Source: Thomson Reuters), *1 USD equals 1.47 AUD as on November 18, 2019.

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: On a YTD basis, the company’s stock has witnessed a rise of 10.78% while, in the time frame of the past one month, the stock has increased by 4.48%. The company stated that $50 million strategic investments are expected to be deployed towards further accelerating the progress against sustainability goals with the help of additional R&D infrastructure, manufacturing equipment, partnerships and open innovation.

On June 11, 2019, the company wrapped up the acquisition of 100% of outstanding shares of Bemis Company, Inc involving purchase price amounting to $5.2 billion in the all-stock transaction. It was further added that with respect to Bemis transaction, the company assumed $1.4 billion of debt. This acquisition positions the company as a global leader in consumer packaging with a comprehensive global footprint in flexible packaging and greater scale in the primary regions of North America, Latin America, Asia Pacific and Europe. Based on the foregoing, we have valued the stock, using a relative valuation method, i.e., price to earnings multiple, and arrived at a target price of high single-digit growth (in % term). Hence, we give a “Buy” rating on the stock at the current market price of $14.590 (down 0.748% on 18 November 2019).

 
AMC Daily Technical Chart (Source: Thomson Reuters)

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