Australia | Oct 01 2020
This story features AMCOR PLC. For more info SHARE ANALYSIS: AMC
Amid a significant increase in community awareness around the sustainability of plastic, Amcor has outlined its agenda for technological improvement, sustainability and value creation.
-Long-term growth of 10-15% targeted
-Advances in recycling increase the availability of PCR
-Further acquisitions likely on the agenda
By Eva Brocklehurst
Amcor ((AMC)) has highlighted growth from technological improvements, emphasising sustainability and value creation in its yesterday's investor briefing, its first since completing the Bemis acquisition.
Citi is one broker that believes Amcor is supremely positioned for the future of plastic, while UBS remains attracted to the company's leading position across global consumer packaging markets and notes a significant increase in community awareness around the sustainability of plastic.
The briefing also coincides with the potential introduction in the European Union of a levy on non-recycled plastic packaging waste. Amcor is supportive, in general, of the European initiatives, provided funds are used to improve recycling infrastructure. UBS also suggests packaging products that contain higher amounts of recycled plastic content could potentially be exempt from levies.
The company boasts scale and intends to leverage its research, establishing centres of innovation in Belgium and China similar to its US innovation centre in Wisconsin. Beverage packaging which uses innovative inputs is being considered, while the pharmaceuticals sector has been highlighted for further investment along with animal health and plastic vials.
Amcor is targeting long-term growth of 10-15% and has emphasised its value creation model. Organic profit growth is expected to come from growing end-markets and an improving mix as well as product innovation.
Ord Minnett, nevertheless, remains reluctant to price in more sales growth until the company actually reports organic growth at the top line, noting flat volumes and price/mix in FY20. The broker anticipates sales growth of 1% for flexibles and 0.5% for rigid plastics.
Amcor has flagged advancements in recycling, which have increased the availability of post consumer resin (PCR) and the recycling of flexible pouches. The company has an agenda to invest US$50m to accelerate sustainable packaging with new products and the new innovation centres.
The company's Am-Lite HeatFlex product is the world's first recyclable flexible retort pouch for use with baby foods and ready-made meals. Macquarie points out this feature combines recyclability with the benefit of withstanding heat sterilisation.
Management reiterated an intention for 100% recyclable or reusable packaging by 2025 and Macquarie notes Amcor, since 2006, has reduced waste to disposal by -83% and greenhouse gas emissions intensity by -33%.
Currently around 61% of Amcor's flexible products are ready to be recycled with rigid plastic at 95% and cartons at 100%. Morgan Stanley highlights flexible packaging will face the greatest challenges in reaching the target because of the high-performance properties and lack of infrastructure for recycling this type of material.
Yet management has again sought to dispel the myth that multilayer film is not recyclable. Citi believes the MRFF (Medical Research Future Fund) pilot project is a long-term game changer for flexible plastic packaging although costs and scale will ultimately be crucial.
While the company has emphasised the infinite recycling ability of PET (polyethylene terephthalate) in rigid beverage bottles, Macquarie points out, in the US, PET bottles are still recycled at less than 30%, well below aluminium cans.
It is now over a year since the Bemis acquisition was done and dusted and Citi believes Amcor could be on the hunt again. Targets may be more about bolt-on acquisitions and the broker suspects healthcare, which includes both flexible and rigids, would be a logical target.
Rigid plastic is evolving beyond soft drinks and the company has reduced its portfolio to 54% beverages from 77% in 2010. Macquarie considers the specialty containers, such as non-beverage rigid plastics and global closures are potential target areas. The broker points out the flexibles market in North America and Europe remains fragmented and this implies bolt-on potential.
Amcor has indicated it would consider potential investment in recycling infrastructure if it was a faster way to achieve its goals and deliver profitable growth. This makes sense but Macquarie suspects it would offer lower returns, at least initially relative to the existing business. Ord Minnett also highlights the company has ruled out investing in collection assets.
Resin prices have risen because of higher oil prices amid the North American hurricane season. Hence resin, which has been supportive feature over the last 18 months, is appearing to be a modest headwind in Macquarie's view.
Moreover, PCR represented only 8% of total resin conversion in North America, while 13% conversion is expected in FY21. The company's ability to increase PCR content is constrained by system and raw material availability, the broker adds.
Morgan Stanley considers the stock high quality and defensive, generating modest but consistent earnings growth complemented by capital management. A 4.5% dividend yield is on offer, a factor that is increasingly scarce in the broker's observation. UBS agrees the stock is defensive although believes greater visibility around the organic growth profile is required to underpin a PE re-rating.
FNArena's database has five Buy ratings and two Hold. The consensus target is $16.87, suggesting 8.6% upside to the last share price. The dividend yield, on present FX values, is 4.4% and 4.7% for FY21 and FY22, respectively.
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