Amcor: Focusing on higher value markets

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
06 May 2022, 7:00 AM
Sectors Covered:
Industrials

  • Amcor's (ASX:AMC) 3Q22 result overall was marginally above our expectations.
  • 3Q22 YTD constant currency EBIT rose 6% (in line with MorgansF) while underlying EPS increased 11% (+2% vs MorgansF).
  • Management has adjusted FY22 underlying EPS guidance towards the top end of the range, while FCF expectations have moved towards the bottom end of the range due to the impact of higher raw materials costs on working capital.
  • While we increase constant currency earnings forecasts slightly (+1%), updates to FX assumptions see FY22-24F underlying EPS fall by between 0-3%.
  • Our target price increases to (login to view) due to a roll-forward of our model to FY23 forecasts. Add rating maintained.

Flexibles was the standout performer

Flexibles 3Q22 YTD EBIT increased 8% on a constant currency basis, which was 2% above our forecast. EBIT growth reflected good cost control, inflation management and favourable price/mix with AMC continuing to focus on higher value segments such as pet food, coffee, and healthcare.

Rigid Packaging 3Q22 YTD EBIT fell 7%, which was 2% below our forecast. EBIT however grew 4% in 3Q22 (after being down 13% in 1H22 due to raw materials shortages resulting in inefficiencies and higher costs) with operating conditions improving in North America through the quarter.

AMC expects the improved performance to continue for the remainder of FY22 and earnings in 2H22 to be higher than 2H21. For 2H22, we forecast Rigid Packaging EBIT to rise by 5%.

ND/EBITDA at the end of 3Q22 was 3.0x (in line with the pcp) but should come down by the end of FY22 given cash flow is heavily weighted to the fourth quarter. We estimate FY22F ND/EBITDA to fall to 2.7x.

AMC declared a US12.0cps dividend for 3Q22, which was in line with our forecast and above the US11.75cps declared in the pcp.

Volumes remain solid

Despite the challenging operating environment, one of the key takeaways from the result was underlying demand remains solid.

AMC’s group volumes increased 1% in 3Q22 YTD (Flexibles volumes were flat while Rigid Packaging was up 3%) and management said would have been 1-2% higher if not for supply chain constraints. This bodes well for further volume growth when the operating environment improves.

Minor adjustments to outlook guidance

FY22 earnings guidance has been adjusted towards the top end of the range, with constant currency underlying EPS growth now expected to be between 9.5-11% (vs 7-11% previously).

FCF guidance however has been adjusted to US$1.1bn (vs US$1.1-1.2bn previously) due to the impact of higher raw materials costs on working capital.

AMC has repurchased US$423m worth of shares so far this year from the US$600m that is expected to be bought back in FY22.

Changes to earnings forecasts and investment view

While we increase constant currency earnings forecasts slightly (+1%), updates to FX assumptions see FY22-24F underlying EPS fall by between 0-3%.

Our PE-based target price increases to (login to view) due to a roll-forward of our model to FY23 forecasts.

Trading on 15.3x FY23F PE and 4.0% yield we think AMC’s valuation remains attractive for a stable, defensive business with global leading market positions and a good management team.

We see solid long-term growth opportunities from prioritising investment in higher value (and higher growth) segments such as protein, healthcare, premium coffee, pet food, and hot-fill beverages in addition to value-accretive bolt-on acquisitions. Add rating maintained

Risks

Key downside risks include a rise in the AUD/USD, fall in the EUR/USD, higher-than-expected costs and a downturn in the European, North American and Emerging Market economies.

COVID and supply chain disruptions are also risks.

Find out more

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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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