Diversified earnings across the packaging sphere place Amcor ((AMC)) in a strong position. Yet without detail on the impact of raw material inflation brokers are a little wary of just how the next couple of quarters play out.
Management has issued another earnings upgrade, expecting growth in earnings per share of 14-15% in FY21 and narrowing the range to US73.2-73.8c per share. Citi flags the fact guidance assumes a -1% dilutive impact from divestments.
Brokers have also highlighted a slight lifting of guidance regarding Bemis synergies, with management now anticipating “at least” the targeted US$180m by the end of FY22. Of this, Amcor expects US$150m of cumulative benefits by the end of FY21. Incremental synergies in the nine month period were US$55m which compare with a US$70m full-year target.
Macquarie notes the business will start to lap stronger volume comparables over the next 12 months. Volumes over the nine-month period were up 2%, which signalled a slowdown on the first half. Year-to-date volume growth in flexibles is 1% and rigids 4%.
Amcor has indicated that demand in North America has been very strong in rigids, particularly for hot-fill, and this aspect of the business is currently constrained in terms of capacity.
Costs
The company made no mention of the impact of raw materials costs and the impact is yet to be reflected in the top line. Maybe in the fourth quarter? Amcor has been more assertive about passing through cost increases, with a shorter timeframe flagged of 3-4 months rather than up to six months.
Macquarie points out the lag in passing on costs is material in flexibles as the mechanism for passing on costs in the rigids business is more frequent. Some raw material inflation has been included in guidance, the broker adds, although costs have increased further and were exacerbated by the US freeze event in February.
This affected US petrochemical supply which has meant extreme tightness in resin markets. The main issue for Citi is in regard to the impact of resin inflation on earnings for both the March and June quarters and just how much cost recovery will be pushed into FY22.
Ord Minnett moved ahead and downgraded estimates heading into the quarterly in light of rising raw material costs while Morgan Stanley argues concerns about resin costs are overplayed and the business can deliver increased margins nonetheless.
M&A
Acquisitions remain in focus, particularly as Bemis continues to be integrated well. Morgan Stanley notes a number of new investment opportunities were announced including expansion of the Swiss-based aluminium packaging capacity and a flexible packaging plant in China as well as an early-stage investment in a venture called ePac, a short-run flexible packaging provider.
Ord Minnett expects further acquisitions, highlighting two areas: flexibles in Southeast Asia and rigids in North America outside the beverage segment, while Macquarie believes specialty containers and global closures are potential target areas.
While the company remains intent on acquisitions the broker points out it is hard to find the right business, given Amcor’s size and, moreover, acquisitions and buybacks are not mutually exclusive.
In February Amcor announced a further US$200m buyback but still retained the flexibility to pursue acquisitions. The company expects to complete its US$350m buyback in FY21 and Credit Suisse models a new US$500m buyback in FY22, assuming no acquisitions.
Ord Minnett estimates an additional US$300m buyback in FY22 and believes a stable and highly diversified earnings stream appeals to investors looking for defensive exposure. In the broker’s view, consistent improvement in volumes, or further detail on the market share and margin opportunity in sustainable packaging, could drive a re-rating.
Macquarie assesses Amcor is currently trading at a discount to the average of its closest global peers and the Australian Industrials ex Financials, as well as at a premium compared with flexibles peers.
Nevertheless, the broker retains a Neutral rating and prefers stocks with greater cyclical recovery prospects. Credit Suisse calculates Amcor is trading on a higher multiple compared with all peers other than Aptar and also sticks with a Neutral rating.
FNArena’s database has four Buy ratings and three Hold. The consensus target is $17.02, suggesting 6.9% upside to the last share price. Targets range from $16 (Credit Suisse) to $19 (Morgan Stanley).
