Global reach and diverse packaging channels sustained Amcor ((AMC)) through the ebb and flow of demand caused by the pandemic over 2020. Guidance for earnings growth has risen to 10-14% for FY21, from 7-12% prior, on the back of strong volumes and operating performance in the first half. Bemis synergies have been narrowed to the top end of the prior forecast range, at $70m.
The company achieved constant currency growth in earnings per share of 16% in the first half, ahead of most expectations. Ord Minnett concludes the stock has exposure to a highly defensive earnings stream, largely independent of industrial and business cycles.
The broker was impressed the flexibles division was able to achieve organic earnings growth despite the need to bed down the significant Bemis acquisition. Flexibles earnings (EBIT) rose 9% and rigid plastics 10%.
Operating cash flow is also robust, and in FY21 Amcor expects adjusted free cash flow before dividends at the top end of the US$1.0-1.1bn range. Morgan Stanley also judges the business as defensive, noting low double-digital earnings growth and a supportive 4% yield.
Citi suspects Amcor may still face tough comparables in the fourth quarter, reflecting the level of consumer stockpiling from 2020, although any softening of retail is likely to be offset by improvement in the healthcare segments.
The company reports there were extra costs associated with the pandemic, such as for shipping and to take into account people in quarantine. There was also weakness the healthcare sector because of fewer elective surgeries, and this is a high margin category.
Nevertheless, Macquarie points out the offset was stronger volumes in the beverages and grocery channels. North American beverage volumes were up 9% amid strong demand across areas where Amcor could benefit, such as at-home consumption.
Macquarie also likes the traction of new products such as a global first in a recyclable flexible retort pouch with an application for ready-made meals, soups and baby foods. This combines recyclable features with the ability to withstand heat sterilisation.
At this stage the company has not experienced significant broad-based inflation in raw materials, although there is a lag. Credit Suisse expects Amcor will largely recover the lagged increases in in the second half and FY22. While the company will be keen to avoid past experience (the broker notes FY18/19) by trying to get in front of the cost curve, cost inflation amounts to a small earnings risk.
Buybacks Ahoy!
Amcor has increased its buyback by $200m to $350m in FY21 and is on the hustings for further acquisitions. UBS believes free cash flow and balance sheet capacity support share buyback facilities of around $450m for both FY22 and FY23.
Moreover, the integration of Bemis is largely complete which means Amcor can switch to a bolt-on M&A strategy to further supplement growth. Macquarie, too, highlights Amcor, despite increasing its buyback, still has flexibility to pursue acquisitions, and suspects specialty containers and global closures are potential targets.
Undervalued?
As top-line growth improved to 4% in the second quarter versus 2% in the first, Ord Minnett believes this could help boost investor enthusiasm, as the number excludes both currency and raw material movements.
The broker envisages an opportunity for market share gains and margin accretion over the next five years. UBS upgrades to Buy from Neutral, further attracted to the leading position that Amcor holds across the global consumer packaging market.
Earnings resilience, the growth outlook, and dividend yield are expected to support the stock. The valuation is also now attractive for UBS after recent underperformance, with the one-year forward PE (price/earnings ratio) of 14.5x, a -7% discount to the long-term absolute average.
Credit Suisse questions why Amcor is not trading at a strong premium to the global packaging sector. The broker suspects perceived risk is the differentiating feature when it comes to comparing Amcor with rival Aptar.
Amcor has been less consistent in its financial performance over the last ten years. Moreover, Amcor may have an operating advantage to competitors but it appears investors appreciate this less than the main source of Aptar’s advantage – R&D and technical innovation.
The broker agrees the PE and free cash flow yield feel “inexpensive”, while assessing the stock is fair value, and suspects now could be the right time to execute another major acquisition, given Bemis has been integrated very well.
FNArena’s database has five Buy ratings and two Hold for Amcor. The consensus target is $17, signalling 17.2% upside to the last share price.
