Packaging behemoth Amcor ((AMC)) has under-promised and over-delivered, while announcing a new buyback at its AGM. That’s how Credit Suisse assesses the update, as guidance for growth in earnings per share has increased to 7-12% for FY21 from a prior 5-10%.
The new guidance does not factor in the higher level of volume momentum that was achieved in the first quarter and, should such momentum continue, there remains the prospect of a further upgrade, in the broker’s view.
Macquarie points out management also began FY20 with 5-10% growth guidance before ultimately delivering 13%.
Morgan Stanley assesses Amcor as a high-quality, defensive stock that has an attractive yield, and the increased guidance represents a level of confidence that is pleasing, given it is early in the financial year.
Moreover, Morgan Stanley would not be surprised if further upgrades were announced, or guidance was tightened towards the top end, as the year progresses. The quarterly dividend increased to US11.8c and this level is expected to be maintained across FY21.
Constant growth in earnings per share of of 20% in the quarter was well ahead of estimates and Ord Minnett forecasts a free cash flow yield of 6% and a dividend yield of more than 4%, well ahead of peers.
Superficially, Morgans assesses the main driver of its forecast upgrades is the reduction in corporate expenses, although notes there has been a restatement of divisional earnings (EBIT) for FY20. FY20 EBIT for the flexible, rigid plastics and corporate divisions have all been reclassified lower.
Amcor continues to target US$50-70m in cost benefits relating to Bemis in FY21 and US$180m by FY22. Morgans suspects this could be exceeded, given the strong track record. Cash outflow of -$190m was higher than the prior quarter but Macquarie notes the first quarter is seasonally the weakest in terms of cash flow and this also reflects the timing of dividends.
Global Round-Up
Emerging markets such as Latin America and flexible packaging volumes have turned around and Amcor appears to have gained share in North America. Macquarie notes the US has been a strong region for most companies in the September quarter and Amcor was no exception.
Improved momentum in rigid plastics was driven by improved sequential demand in the US convenience channel and the probable stockpiling of pantry items such as Gatorade. Improvement comes despite PepsiCo reporting declining US volumes. Rigid volumes in North America were up 7%.
Marginally lower volumes were experienced in European flexible packaging because of weaker confectionery/yoghurt demand and there was a negative impact on medical demand because of reduced elective surgery.
Citi notes the guidance upgrade reflects similar reports from peers amid strong volume growth in the Americas and Asia Pacific. Amcor’s North American flexible volumes rose 5%, which was well above peers that reported more flat outcomes.
Amcor attributed the outperformance to gains in market share and winning new business. Hence, the broker suspects the increased scale and product range following the Bemis acquisition are now bearing fruit.
Buyback
Amcor has announced a US$150m share buyback, and Credit Suisse suspects the company, not overtly, is “blending” dividends and buybacks while targeting a dividend yield of over 4%.
Management has indicated valuations of prospective acquisitions in packaging are rich and this could have influenced the decision to purchase stock, suggesting to the broker there is less potential for M&A at present.
Macquarie, too, in noting there is financial capacity to pursue further disciplined M&A, suggests there may be few opportunities, while specialty containers and global closures are potential target areas for the future.
FNArena’s database has five Buy ratings and two Hold. The consensus target is $17.42, suggesting 8.0% upside to the last share price. Targets range from $15.90 (UBS, yet to comment on the update) to $19.00 (Morgan Stanley). The dividend yield on present FX values for FY21 and FY22 is 4.1% and 4.3%, respectively.
See also Amcor A Trailblazer In The Future Of Plastic on October 1, 2020.
