Amcor Yield A Rarity In Current Environment

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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.

Morgans continues to find valuation attractive for such a high-quality defensive business. The broker's underlying forecasts remain broadly unchanged for FY20-22, as upgraded assumptions for flexibles are offset by adverse FX movements. Rigids are downgraded because of a softer outlook for beverages.

The lingering concern for Ord Minnett relates to the top-line performance, although if trends in the third quarter can be sustained then multiples should re-rate. There is also ample opportunity for the company to grow ahead of peers because of Bemis synergies, sustainability efforts and further acquisitions or buybacks.

Valuation

Morgan Stanley welcomes the delivery of synergies and considers the upgrade to guidance a significant positive development, implying upside to forecasts.

The broker highlights the dividend yield, noting this is an increasingly scarce attribute in the current environment. Similar to the situation post the GFC, Morgan Stanley expects the sustainable and growing yield to be in focus against a backdrop of low interest rates.

UBS also lauds the benefits of the company's geographic spread and its leading position across the global consumer packaging market. Moreover, earnings resilience and a strong dividend yield will support the stock, particularly in an environment where cyclical industrial stocks are facing both downgrade risks and deferred dividends. Still, valuation is a stumbling block and the broker retains a Neutral rating.

FNArena's database has six Buy ratings and one Hold (UBS). The consensus target is $16.46, suggesting 17.6% upside to the last share price. The dividend yield on present FX values for FY20 and FY21 is 5.1% and 5.5%, respectively.

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