Amcor Limited
Amcor (ASX: AMC) has announced its largest acquisition till date in early August 2018. The group updated the market about its intent to acquire Bemis, a leading supplier of flexible plastic packaging in America. As per the progress, the transaction is expected to be completed by March 2019 quarter.
Association with Bemiswill help Amcor to place itself as the global leader in consumer packaging. The transaction will provide strong financial profile along with earning accretion and value creation for the shareholders.
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Margin Improvement (Source: Company Reports)
Improved Margins: FY18 Margins and returns remained strong and were in line with last year. EBIT margins have almost doubled over the last 10 years from 7% to around 12%, which puts Amcor at or near the top of large scale players in the packaging industry.
Low Earnings in flexible packaging business: Earnings in the flexible packaging business remained modestly lower than the prior year. The packaging industry faced challenges from the growing prices of the raw materials, which in turn adversely impacted the segment earnings by approximately US$43 million. Weak customer and market volumes further reduced the demand for beverage containers and led to closures in North America. Earnings were higher than the last year under the specialty container business which was supported by the recent acquisition of Sonoco business. Economic conditions remained mixed in Latin America with overall earnings in line with the last year period.
Technically,the scrip after making lower lows from the month of August till the month of October, has now shown some recovery in the month of November. Candles formed “Three black Crow” pattern on the price charts from August till October. In the month of November, candles on daily chart have formed higher high. Relative Strength Index with positive divergence and MACD (moving average and convergence indicator) consolidating around the signal line indicate an upside move to continue.
Fundamentally,the market cap of AMC was recorded at $15.81bn, and the stock trades at a P/E of 16.12x (lower than many peers) and beta of 0.48x. At current juncture the scrip is trading at the price levels of $13.76. The group’s 1Q FY19 has been in line with expectations and constant currency growth in earnings for FY19 indicate a decent valuation potential.
Restructuring initiatives taken by AMC in order to reduce costs and aim to position the business for higher earnings are expected to deliver benefits of US$15 to US$20 million by the end of the 2020 financial year. FY19 free cash flow is expected to be between US $ 200 and US $ 300 million. Restructuring initiatives along with positive divergence formation as per technical charts, exhibit a “Buy” scenario at the current price levels of $13.76.
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