Packaging major Amcor (AMC) has been on the receiving end of a variety of responses to its half year result. There have been two downgrades and one upgrade on the FNArena database. JP Morgan has downgraded its recommendation to Sell from Hold, Citi has downgraded to Hold from Buy while Credit Suisse has upgraded to Buy from Sell. What’s going on?
JP Morgan found contract wins, the company’s acquisitions and the restructuring were all very positive but the broker considers the stock is now expensive on both an absolute and relative basis. This follows the significant share price appreciation over the last three months. Hence a Sell rating, the only one on the database.
In the Hold category, UBS has raised its forecasts but kept its rating as it sees little scope for outperformance. The profit result was 4% ahead of UBS estimates and underlying trends were generally positive in the broker’s view. The broker is raising FY13-15 forecasts by 3-7% to reflect recent acquisitions, lower costs in the Australasia division, higher margins and a lower net interest bill. Citi liked the improvement in flexibles and return to double digit volume growth in Latin America but also sees the recent share price outperformance limiting a further rally. The broker admits a large degree of earnings certainty and multiple earnings growth drivers make the stock an attractive investment but, with a 16.4 times FY13 price/earnings ratio, valuation now adequately reflects the premium for both merger and acquisition and organic growth potential. A Buy rating is no longer justified.
Deutsche Bank on the other hand finds its Buy rating justified as the stock is trading at a 2% discount to the broker’s revised valuation of $9.30. The broker sees full year earnings driven by resilient volumes, recent acquisitions, growth in emerging markets, cost reductions, and ongoing operational improvement. If there was one weak spot in the result, Deutsche Bank observed, it was the profit on asset sales of $40m, although the broker admits this has funded the Botany start-up costs of $23m and other restructuring costs, but the net benefit was just $5m.
Credit Suisse previously had a Sell rating, partly based on the Australian currency headwinds. The broker noted currency rates reduced net profit by $20m in the latest half. A one cent move in the AUD/EUR rate impacts profit by $5 million one way or the other while the sensitivity to the AUD/USD pair is up or down $3m annualised. The broker suggests the stock may now have a positive push from the euro’s rally in the second half. Furthermore, CS likes the expanded margins in flexibles and rigid plastics. Moreover, the stock has the balance sheet capacity to go after the acquisitions it desires. The broker also finds the company a disciplined acquirer of businesses with $400-450m of acquisitions over the last 12 months at under six times enterprise value/earnings before synergies.
In the past, Macquarie believed this acquisition discipline made Amcor interesting. Acquisitions have been a key part of growth plans for some time, but a minimum 20% return on capital is required. After the results, the broker again highlighted this factor, noting Amcor has ten people in its M&A team on a global basis, tracking $2 billion or more in potential opportunities. The latest acquisition, tobacco packager Shorewood, showed such evidence of good synergy potential. Macquarie describes it as a logical bolt-on at a cheap price with 5.2 times trailing earnings multiples that are expected to reduce to 3.3 times post synergies. Macquarie doesn’t mind the run up in the share price and believes the trading multiples are undemanding, given earnings growth of 7% is forecast for the second half and 10% growth is forecast for FY14.
Macquarie said Australasia (13% of earnings) has been a laggard for a number of years for the company but now has the potential to substantially increase earnings based on $70m of benefits from restructuring and closures. On the downside, the businesses exposed to domestic manufacturing are still challenged and part of this is structural. Petrie cartonboard mill was cash flow negative but this will be closed by December 13. The other negative is that there is still not much of a US recovery, with packaging distribution earnings down, although the broker admits this more reflects a lag in raw material recovery.
The net result of ratings changes leaves Amcor with four Buy (or equivalent) ratings in the FNArena database, three Holds and one Sell. The consensus target price has risen to $9.39 post-result from $843, offering less than one percent upside from yesterday’s closing price.