Amcor: Volumes trending lower

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
08 February 2023, 8:00 AM
Sectors Covered:
Industrials

  • Amcor’s (ASX:AMC) 1H23 result was broadly in line with our expectations and Visible Alpha consensus. However, management struck a more cautious tone on the outlook with volumes coming under pressure from destocking and weaker consumer demand.
  • While FY23 guidance for underlying EPS (incl. FX) of US77-81cps and underlying free cash flow of ~US$1.0-1.1bn was maintained, management said current expectations are for these metrics to come in at the lower end of the range.
  • Key positives: AMC continues to deliver price/mix benefits; FX headwind from a stronger USD (-4%) is expected to be slightly less than previously expected (-5%).
  • Key negatives: More cautious demand outlook; Lower volumes in both Flexibles and Rigid Packaging; Group EBIT margin fell 30bp to 10.8% due to the passthrough of raw materials costs; FCF was -US$61m (vs US$105m in the pcp).
  • We adjust FY23-25F underlying EPS by -2%/-1%/-3%.
  • Our target price falls to (login to view) and we maintain our Hold rating.

1H23 result was broadly in line

AMC’s 1H23 result was largely in line with expectations with underlying EBIT rising 3% to US$791m (+1% vs MorgansF and +0% vs Visible Alpha consensus) and underlying NPAT steady at US$548m (+4% vs MorgansF and +3% vs Visible Alpha consensus).

On a constant FX basis, underlying EBIT jumped 8% and underlying EPS rose 8%. 

Management said volumes fell away toward the end of 2Q23 with demand impacted by customer destocking and weaker consumer demand. While there was some improvement in January, the outlook for demand remains uncertain.

Volumes were lower in both segments

Flexibles EBIT increased 2% (or +8% on a constant FX basis), which was 1% above our forecast. Earnings continued to be driven by favourable price/mix as the business focused on higher value segments (eg, healthcare) and cost out, which more than offset softer (-1%) volumes in all regions.

Healthcare and pet care were standout categories while snacks and confectionery were weak. EBIT margin fell 30bp to 12.6%, largely related to the passthrough of higher raw material costs. 

Rigid Packaging EBIT lifted 5% (or +7% on a constant FX basis), which was 1% below our forecast. Like the Flexibles segment, price/mix and cost out positively contributed to earnings growth, which more than offset a decline (-2%) in volumes.

AMC said its higher weighting to the convenience channel in North America weighed on volumes as consumers tended to revert to multi-pack and smaller unit sizes when faced with higher cost-of-living pressures.

Outlook

While FY23 guidance for underlying EPS (incl. FX) of US77-81cps and underlying free cash flow of ~US$1.0-1.1bn was maintained, management is more cautious on the demand environment, and current expectations is for these metrics to come in at the lower end of the range.

AMC has also increased the size of its FY23 share buyback program from US$400m to US$500m, which will be funded by some of the proceeds from the sale of its Russian operations. AMC only bought back US$40m worth of shares in 1H23 but expects the balance to be executed in 2H23.

Changes to earnings forecasts

We adjust FY23-25F underlying EPS by -2%/-1%/-3%.

Investment view

Our PE-based target price falls to (login to view) and we maintain our Hold rating.

We continue to view AMC as a good business with global leading market positions and a capable management team. However, the trend in volumes is down with further weakness likely as cost-of-living pressures increase globally.

Management has flagged that FY23 earnings will likely fall toward the bottom end of its guidance. While several scenarios can still play out, if operating conditions don’t improve, we see some downside risk to earnings guidance.

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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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