Amcor: Reliable as always

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Alex Lu
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By Alex Lu
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Date posted:
03 February 2021, 4:00 PM
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  • Amcor's (ASX:AMC) 1H21 result on a constant currency basis was ahead of our expectations. On a reported basis, the result was slightly below with FX being the difference.
  • Divisions (constant FX): Flexibles EBIT +9%; Rigid Plastics EBIT +10%.
  • Management has upgraded FY21 underlying EPS growth guidance to 10-14% (Morgans +12%) vs 7-12% previously. This continues a strong track record of outperformance over the past 12 months despite the ongoing pandemic.
  • Following some adjustments to earnings forecasts our target price falls slightly from A$17.30 (login to view revised target price). Add rating maintained.

1H21 result was ahead of expectations

AMC’s 1H21 result on a constant currency basis was stronger than we expected, with underlying EBIT up 8% (vs Morgans +7%) and underlying EPS up 16% (vs Morgans +13%). On a reported basis, the result was slightly (1-3%) below our forecasts with FX being the difference.

Both divisions performed well with Flexibles EBIT (constant FX) up 9% and Rigid Plastics EBIT (constant FX) up 10%. Bemis synergy benefits continue to track ahead of schedule with US$35m delivered in 1H21.

Management is now targeting benefits of ~US$70m in FY21 (vs US$50-70m previously) with total synergies expected to reach US$150m by the end of FY21.

While AMC has maintained its US$180m target by the end of FY22, it is looking increasingly likely that this will be exceeded. ND/EBITDA at 2.9x remains healthy and AMC has announced an additional US$200m share buyback program on top of the US$150m buyback announced in November.

1H21 DPS of US23.5cps was broadly in line with our US23.8cps forecast.

Free cash flow fell to US$276m vs US$310m in the pcp, although excluding US$50m related to the timing of cash tax payments in the US, free cash flow was higher.

Flexibles and Rigid Plastics both performed well

Flexibles delivered a solid result with EBIT (constant FX) rising 9%. Overall volumes were up 2% and pleasingly, all geographic regions delivered growth.

Food, pet food and beverage volumes were higher but partially offset by weakness in certain healthcare markets due to reduced elective surgery rates and lower prescriptions trends.

Costs were well-maintained as usual and along with Bemis synergy benefits, drove Flexibles EBIT margin up 110bps to 13.5%. Rigid Plastics also performed well, with EBIT (constant FX) increasing 10%.

Volumes in North America were higher (hot-fill was particularly strong, up 19%) with demand reflecting higher at-home consumption and new products. This was partly offset by marginally lower volumes in LatAm, although there was an improving trend through the half.

Rigid Plastics EBIT margin increased 40bps to 9.9%, reflecting positive mix and higher North America volumes despite cost pressures in labour and transport.

Maintain Add rating

Following changes to earnings forecasts our PE-based target price decreases slightly from A$17.30 (login to view revised target price).

In our view, AMC is a high-quality, defensive business with global leading market positions and a steady growth profile (3-year forecast EPS CAGR of 9%). Trading on 15.4x FY21F PE and 4.2% yield we continue to see the valuation as attractive and maintain our Add rating.

Key downside risks include FX, higher raw materials costs and COVID-19 related disruptions to operations.

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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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