Amcor: Rock solid

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Alex Lu
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By Alex Lu
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Date posted:
19 August 2021, 8:00 AM
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  • Amcor's (ASX:AMC) FY21 result was broadly in line with expectations.
  • Both divisions performed well with Flexibles EBIT (constant FX) up 9% and Rigid Plastics EBIT (constant FX) increasing 8%.
  • FY21 underlying EPS (constant FX) grew 16%, which was slightly ahead of our 15% forecast and management’s guidance for 14-15% growth.
  • For FY22, management has guided to underlying EPS (constant FX) growth of 7- 11% (MorgansF +9%). Given AMC’s track record over the past 18 months, this guidance could prove to be conservative.
  • We make minor adjustments to earnings forecasts with FY22F underlying EBIT rising by 1% to US$1,752m. Our target price increases to (login to view) following another strong result and positive outlook. Add rating maintained.   

FY21 result was largely in line with expectations

FY21 underlying EBIT increased 8% to US$1,621m (-1% vs MorgansF and in line vs Bloomberg consensus) and underlying NPAT rose 13% to US$1,158m (+1% vs MorgansF and +1% vs consensus).

One of the key highlights of the result was a 60bp improvement in group EBIT margin to 12.6% despite sharp increases in raw material costs and supply constraints. AMC was able to use its scale, global sourcing model and contractual passthrough mechanisms to manage raw materials, with Bemis synergy benefits also positively impacting margins.

Bemis synergies are running ahead of schedule with US$75m delivered in FY21, bringing cumulative benefits to US$155m. Management now expects the original target of US$180m by FY22 to be exceeded by at least 10% (Morgans US$200m).

The balance sheet remains in good shape with ND/EBITDA falling to 2.7x (FY20: 2.9x) versus management’s 2.25-2.75x target. With the Bemis integration nearing completion, AMC hinted at potential bolt-on M&A opportunities. We expect management to remain disciplined with any acquisition likely to be accretive to the group’s current ROFE of 15.4%.   

Both divisions performed well

Flexibles EBIT (constant FX) rose 9% reflecting higher volumes, strong cost management and Bemis synergy benefits. Flexibles EBIT margin rose 90bp to 14.2%. North America volumes were higher with strength in meat, frozen food and condiments partially offset by lower healthcare, home and personal care.

Europe volumes were marginally lower with growth in pet food, cheese and coffee offset by weaker healthcare and yoghurt.

Rigid Plastics EBIT grew 8% driven by higher volumes in both North America and Latin America and favourable price mix. This drove Rigid Plastics EBIT margin up 20bp to 10.6%, notwithstanding higher labour and transport costs. Demand for hot fill categories in North America (such as sports drinks and ready to drink tea & juice) was particularly strong, with volumes up 13%.

Outlook remains positive

For FY22, management has guided to underlying EPS (constant FX) growth of 7- 11% (MorgansF +9%) and adjusted free cash flow of US$1.1-1.2bn (MorgansF US$1.17bn).

AMC also expects to undertake a ~US$400m buyback following similar-sized buybacks in FY21 and FY20.

Changes to earnings forecasts and investment view

We increase FY22F underlying EBIT by 1% to US$1,752m while underlying NPAT also rises by 1% to US$1,241m.

We continue to see AMC as a highly defensive business with dominant global market positions and a well-regarded management team.

Trading on 16.7x FY22F PE and 3.6% yield we view the valuation as attractive and following another strong result and positive outlook, our PE-based target price increases to (login to view). Add rating maintained.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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