Amcor Grasps The Nettle On Reusable Plastic

Australia | Nov 11 2019

Amcor has made a solid start to FY20 amid cost savings from the Bemis acquisition. Moreover, brokers have brushed aside plastic sustainability concerns.

-Defensive earnings stream and attractive dividend yield underpin stock
-Firm margins offset softer revenue performance in the first quarter
-Amcor stepping up responsible packaging solutions

 

By Eva Brocklehurst

Amcor ((AMC)) is experiencing both opportunities and sustainability concerns in its diversified packaging business and has flagged a solid start to FY20. North American and European flexible packaging recorded low single-digit growth in volumes in the first quarter.

The company announced constant currency earnings (EBIT) growth of 10%. Cost savings from the Bemis acquisition and favourable movements in raw material prices contributed. However, the underlying business grew as well.

Ord Minnett was encouraged by the solid organic earnings growth, believing this may have been an area of concern for some investors, and considers the stock undervalued and the well-diversified earnings stream not fully appreciated.

The broker calculates, on a forward PE (price/earnings ratio) multiple of 15x and compound annual growth rate of 7% over FY20-22 estimates, this is an attractive investment proposition.

Ord Minnett factors in US$20m in cost benefits from Bemis in the second quarter along with a further US$5m support from the timing of the pass-through of raw material costs. Management remains confident about achieving targeted synergies of US$65m in FY20.

Morgan Stanley was pleased with the quarterly earnings growth despite some softness in Latin American rigid plastics (primarily driven by legacy Bemis business) and the de-stocking in European tobacco packaging. The broker suggests margins helped offset the softer revenue performance. Citi agrees and the defensive earnings stream, attractive dividend yield and ongoing share buyback underpin its Buy rating.

Credit Suisse has upgraded to Outperform from Neutral, pleased with the evidence that volume growth is being achieved in more obscure lines. Nielsen scan data had indicated that US supermarket food volumes were weak, particularly in terms of key Amcor/Bemis customers.

However, Amcor has provided evidence of volume growth in medical flexible packaging, liquid flexible pouches and pharmaceutical bottles. The company has reiterated its FY20 guidance for earnings per share of US61-64c. Cash flow guidance is also maintained.

Sustainability

Of note, UBS highlights the amount of time on the conference call spent discussing the sustainability agenda and notes a significant increase in community awareness on the topic of plastics sustainability.

The broker expects Amcor will step up its efforts to engage on this issue now the Bemis transaction has been completed. Citi finds little evidence of any impact on the rigid plastics business from sustainability concerns, also noting the company is taking up the challenge in terms of responsible packaging solutions.

Credit Suisse finds it difficult to forecast the second quarter and second half but notes overall plastic volumes increased and, therefore, environmental concerns do not appear to be affecting overall consumption of plastic.


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