Amcor: Business remains resilient despite FX headwinds
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 07 November 2022, 8:00 AM
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- Amcor's (ASX:AMC) 1Q23 result on a constant FX basis was above our expectations.
- Constant FX EBIT rose 9% (vs MorgansF +6%) while underlying EPS increased 10% (vs MorgansF +3%).
- Management has maintained guidance for FY23 constant FX underlying EPS growth of 1-6% (including a 2% drag from the exit of AMC’s Russian operations). Report EPS guidance (incl. FX) however has been reduced by 4% at the midpoint due to the higher USD.
- While we make negligible adjustments to constant FX underlying EPS estimates, updates to FX assumptions see FY23-25F underlying EPS (incl. FX) fall by between 3-6%.
- Our target price decreases to (login to view). Hold rating maintained.
Flexibles was strong despite lower volumes
Flexibles revenue (constant FX) rose 3% and EBIT increased 11%. The result reflected price/mix benefits of 4%, partly offset by a 1% decline in volumes, with underlying EBIT margin (excl. the dilutive impact of the passthrough of higher raw materials costs) increasing 110bp.
We think this was a good outcome and highlights AMC’s track record of strong cost management.
Volumes in North America were down low single-digits with increased demand in healthcare, cheese and home and personal care offset by declines in condiments, bakery, snacks and confectionary.
European volumes were also down low single-digits driven by growth in pharmaceuticals, capsules and liquid beverages, offset by weaker demand in home and personal care, coffee, yogurt, snacks and confectionary. Volumes in Asia were higher while Latin America was flat.
Rigid Packaging delivers positive mix
Rigid Packaging recovered from significant supply chain challenges in North America in the pcp to deliver 7% (constant FX) EBIT growth on the back of a 3% uplift in revenue.
Like the Flexibles division, Rigid Packaging was able to deliver margin expansion (excl. the passthrough of higher raw materials costs) with EBIT margin rising 30bp on the back of volume growth, inflation recovery and good cost control.
Volumes for the quarter rose 1% with a 3% decline in North America more than offset by high single-digit growth in Latin America. The weakness in North America was mainly driven by lower cold-fill volumes despite 6% growth in hot-fill and increased demand in specialty containers.
In our view, the change in mix towards hot-fill isn’t necessarily negative given the better margins on offer and aligns with management’s strategy of targeting higher value segments.
FY23 constant FX guidance unchanged
Management has reiterated guided for FY23 constant FX underlying EPS growth of 1-6% (MorgansF +4%), which includes a negative impact of 4% from higher interest costs and a 2% drag from AMC’s decision to exit its operations in Russia.
However, due to the stronger USD, reported EPS guidance has been adjusted downwards to between US77-81cps (vs US80-84cps previously).
While no shares were bought back during 1Q23, AMC continues to target US$400m in buybacks in FY23.
Adjusted free cash flow guidance has been maintained at US$1.0-1.1bn (MorgansF US$1.02bn).
Changes to earnings forecasts and investment view
While we make negligible adjustments to constant FX underlying EPS estimates, updates to FX assumptions see FY23-25F underlying EPS (incl. FX) fall by between 3-6%.
Our PE-based target price falls to (login to view). Hold rating maintained.
We continue to view AMC is a highly defensive business with global leading market positions and a good management team.
While the stock is not expensive (14.6x FY23F PE and 4.2% yield), in the context of our expectations for broadly flat EPS growth over the next 2 years (incl. FX), we think further share price gains will be limited in the short term and prefer a lower entry price into the stock.
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