Amcor Yield A Rarity In Current Environment

Australia | May 13 2020

Amcor has upgraded earnings growth guidance, a rare occurrence in the current environment, and the stock's dividend yield remains a key feature.

-Synergies from Bemis acquisition underpin flexible plastics
-FY20 earnings growth of 11-12% now expected
-Strong dividend yield expected to support the stock


By Eva Brocklehurst

Amcor ((AMC)) has managed to keep its 250 plants across the globe running and supply chain on tap, in order to produce packaging for food and healthcare products with minimal disruption from the pandemic.

The flexibles division has achieved 16% growth in operating earnings (EBITA) in the March quarter amid 1% overall volume growth. Profit per unit increased, which Credit Suisse suspects was driven by the scale benefits of North American plants and reduced discounting in a period of heightened demand.

Ord Minnett agrees there was probably some benefit from pandemic-related demand but, nevertheless, highlights pleasing cost controls in flexible plastics, amid significant earnings growth and synergies from the Bemis acquisition.

A mix-shift towards healthcare and other high-value products also helped. Morgan Stanley assesses the benefit of pantry stocking was evident in North America while volumes were constrained by lockdowns in China and India, expected to normalise in the fourth quarter.

Rigid plastics were somewhat mixed, the broker points out, with revenue declining -4% and the division returning to profit growth, albeit supported by restructuring benefits. Credit Suisse had suspected the closures of premises using rigid plastics would affect volumes but this has turned out to be less severe than feared.

There is some uncertainty regarding the extent of panic buying skewed to PET items, such as water, while investors remain concerned about substrate switching, although Morgan Stanley can find no evidence for this to date.

For the first time the company has reported on a quarterly basis, with underlying net profit up 36.5%. Amcor now expects FY20 growth of 11-12%, upgrading from previous guidance of 7-10%.

UBS points out around two thirds of this upgrade is a result of lower borrowing costs. Guidance now implies a strong fourth quarter, which Amcor expects will be supported by seasonal demand in the northern hemisphere.

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