Company Reports

Narrow-moat Amcor provided updated earnings guidance following a stronger-than-expected fiscal third quarter and an improved outlook for the remainder of fiscal 2024. We raise our fair value estimate by 5% to AUD 17.80/USD 11.50 from AUD 17/USD 11 and our adjusted earnings per share estimate to USD 0.69 from USD 0.67 for fiscal 2024, at the bottom end of updated guidance. Our improved near-term forecast is driven by a small uplift in operating margin from recent cost-saving and restructuring programs and a sooner-than-expected recovery in volume. We now forecast a low-single-digit increase in volume from fiscal 2025 versus a low-single-digit decline previously. Beyond this, we maintain our volume and price growth assumptions.

Amcor’s strategy revolves around strategic acquisitions and divestments, market share growth, and investment in capacity and capabilities. We see several merits to its strategy, which has led to organic and acquisitive growth and average annual returns on invested capital of 17% over the five years to fiscal 2023, comparing favorably against a weighted average cost of capital of 8%.

Amcor’s strategy revolves around strategic acquisitions and divestments, market share growth, and investment in capacity and capabilities. We see several merits to its strategy that has led to organic and acquisitive growth, and average annual returns on invested capital of 17% over the five years to fiscal 2023, comparing favorably against a weighted average cost of capital of 8%.

We lower our fair value estimate for Amcor by 4% to AUD 17. The driver of the revision to our fair value estimate is our revised sales volume estimates. We have reassessed our view on volumes in the developed market segments of North America, Western Europe, Australia, and New Zealand, and are tapering this back slightly to align with our longer-term population growth expectations. Within developed markets—about 75% of sales—we expect most revenue growth from a mix shift toward premium products and that per capita consumption remains stable over the forecast period. This drives a low-single-digit decline in our midcycle volumes from our prior forecast. We forecast 10-year group sales and EBITDA compound annual growth rates of 2% and 3%, respectively.

Amcor’s strategy revolves around strategic acquisitions and divestments, market share growth, and investment in capacity and capabilities. We see several merits to its strategy that has led to organic and acquisitive growth, and average annual returns on invested capital of 12% over fiscal years 2019-23, comparing favorably against WACC of 8%.

We modestly raise our fair value estimate for narrow moat Amcor by 2% to AUD 17.80 (USD 11.60), on the time value of money. In line with our expectations, first-half fiscal 2024 adjusted EBIT of USD 709 million was 6% lower than the previous corresponding period on a constant comparable currency basis. The key drag on earnings was a 9% decline in volumes. About half of this was due to customer destocking of excess inventory. The remainder was due to weaker end-customer demand as household budgets became stretched by high-interest rates. As a result, households are spending less on discretionary goods and switching to lower-cost or bulk items, which generally have less packaging. Despite this, we expect a stronger second half as destocking abates. Our fiscal 2024 forecast assumes volumes decline mid-single digits, with our earnings forecasts unchanged.

Amcor’s strategy revolves around strategic acquisitions and divestments, market share growth, and investment in capacity and capabilities. We see several merits to its strategy that has led to organic and acquisitive growth, and average annual returns on invested capital of 12% over fiscal years 2019-23, comparing favorably against WACC of 8%.

We maintain our AUD 17.50 per-share fair value estimate for narrow-moat Amcor. First-quarter fiscal 2024 adjusted EBIT of USD 358 was 9% lower than the previous corresponding period, but in line with our expectations and we maintain our full-year forecasts. The result was hurt by lower customer demand, with sales volumes about 8% lower versus the PCP. Currently, shares screen as undervalued. Amcor looks cheap compared with other defensive stocks. Its 1-year forward price/earnings multiple is 13 times at present, versus no-moat Coles and narrow-moat Woolworths at 20 and 23 times, respectively.

We increase our fair value estimate for narrow-moat-rated Amcor by 9% to AUD 17.50 per share. The upgrade is primarily driven by a weaker Australian dollar, and secondarily, a less severe cyclical earnings trough in fiscal 2024 than we previously expected. At current prices, shares screen as undervalued. We think the market is skeptical of a return to earnings growth in the second half of fiscal 2024. However, we believe Amcor has taken appropriate steps to cut costs and a stabilization of consumer demand is likely with inflationary pressure gradually subsiding.

We maintain our AUD 16.70 per share fair value estimate and full year earnings forecast for narrow-moat Amcor following the release of third-quarter fiscal 2022 results that aligned with our expectations. Flexibles segment underlying EBIT increased 8% year to date in comparable constant currency terms to USD 1.07 billion, buoyed by sales mix initiatives aimed at channelling volumes to higher margin segments as well as strong cost control. Rigids underlying EBIT decreased approximately 7% year to date to USD 194 million in comparable constant currency terms, due to supply chain disruptions earlier in the year. The segment returned to earnings growth in the third quarter as operational headwinds eased with comparable constant currency EBIT growth of 4% versus the prior corresponding period. While dynamics differ across geographies, group volumes increased 1% year to date, aligning with our expectation for normalising volumes as consumer shopping habits trend toward pre-pandemic norms.

We maintain our forecasts and AUD 16.70 fair value estimate for narrow-moat Amcor following the release of half-year fiscal 2022 results. The flexibles and rigids segment results largely tracked our expectations. Group volumes increased by 1% over the prior corresponding period, consistent with our expectation for normalising volumes as at-home consumption trends moderate from elevated levels during the height of the coronavirus pandemic. Flexibles' underlying EBIT of USD 691 million increased 7% in comparable constant currency terms driven by favourable mix shift and cost control. Margins remained robust with USD 480 million in raw material cost inflation passed on to customers. As anticipated, the rigids segment was affected by supply chain and raw material disruptions, resulting in process inefficiencies and higher costs. Despite passing on more than USD 170 million in raw material inflation, comparable constant currency EBIT decreased 13% to USD 117 million. From fiscal 2024, we forecast a return to population-linked volume growth for Amcor’s packaging product range, which is largely tied to the consumption of household staples.

We expect a softer organic performance from Amcor in fiscal 2022 as consumers begin to venture out once more, driving at-home consumption patterns toward more normalised pre-pandemic levels. Nonetheless, with the headwind posed to organic volume growth a transitory one, we make no change to our long-term outlook for the narrow-moat stock. Amcor is guiding to EPS growth of 7%-11% in fiscal 2022, implying an EPS guidance range of USD 79 cents-USD 81 cents. Despite our glum outlook for volumes in fiscal 2022, we forecast EPS of USD 81 cents--at the top end of Amcor’s EPS guidance range--owing to a combination of a final instalment of Bemis synergies, better fixed cost recoveries and a reduced share count owing to Amcor’s freshly announced share buyback programme. A time value of money adjustment sees us lift our fair value estimate by 1.5% to AUD 16.70 per share. Amcor shares screen as modestly overvalued relative to our revised valuation.

The strength of the ongoing recovery of the global economy from the coronavirus pandemic supports near-term earnings for Australian packaging stocks. Set against global economic activity that is rebounding at its fastest post-recession pace in some 80 years, we still expect robust near-term demand for consumer packaging. Accordingly, we maintain our fiscal 2021 earnings estimates for narrow-moat Amcor and Pact Group and no-moat Orora.

Heightened at-home consumption of consumer staples categories--amid the ongoing coronavirus pandemic--drove strong demand for Amcor’s flexible and rigid plastic packaging in the first-half fiscal 2021. While flexible packaging volume growth of 2% tracked modestly ahead of our full-year expectations, first-half rigid packaging volume growth was incredibly strong at 6%. Having upgraded our full-year volume expectations--which had previously factored a modest coronavirus-related headwind to household consumption and related consumer packaging demand--we increase our full-year fiscal 2021 EBIT estimate by 5% to USD 1,638 million. As a result, our 6% upwardly revised fiscal 2021 EPS forecast of USD 72.8 cents sits toward the upper-end of Amcor’s upgraded full-year EPS guidance range of USD 70.6 cents-USD 73.2 cents.

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2020. Amcor’s operations span 43 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets.

Narrow-moat Amcor is off to a good start in early fiscal 2021, delivering robust first-quarter volume growth unimpacted by a global macroeconomic backdrop that has been materially weakened by the ongoing coronavirus pandemic. Unabating demand for Amcor’s plastic packaging amid the pandemic is unsurprising given consumer staples categories—which demand for Amcor’s plastic packaging largely stems from--benefit from inelastic demand through the economic cycle. Therefore, investors remain focussed on the potential for EBIT margin expansion with the capture of Bemis acquisition synergies ongoing. On this front, our long-term expectations remain unchanged. We continue to expect synergy delivery combined with modest operating leverage to drive EBIT margins toward 15% at midcycle, providing for a 10-year EBIT CAGR of approximately 6%.

While organic volume growth eluded narrow-moat Amcor again in its fiscal-year 2020 second quarter, the near-term softness in volumes experienced by both Amcor’s flexibles and rigids businesses provides us no grave cause for concern. Certainly, Amcor’s flat year-to-date volumes act as a headwind for fiscal 2020 earnings. Accordingly, we reduce our full-year fiscal 2020 EBIT estimate by 2% to USD 1,423 million, inclusive of the planned realisation of USD 80 million in Bemis integration synergies. However, with demand for plastic packaging intrinsically linked to household consumption, our long-term expectations for modest top-line growth approximating 3% remain intact. And with our long-term operating margin forecasts--which remain set to benefit from the delivery of Bemis deal cost synergies--also unchanged, our long-term earnings expectations for Amcor also remain in place. Despite the lack of change to our fundamental view of Amcor, we’ve raised our fair value estimate by 5% to AUD 15.30 per share. The recent depreciation of the Australian dollar and the time value of money drives our fair value estimate revision. Amcor shares continue to screen as approximately fairly valued, trading at a slim 3% premium to our valuation.

While early signs of a return to robust organic growth were lacking in narrow-moat Amcor’s first-quarter fiscal 2020, our long-term thesis remains unchanged. Long-term, we continue to expect growth in population and per capita income to drive organic top-line growth of approximately 3%. Synergy realisation after the Bemis deal closure and modest operating leverage will drive EBIT margins moderately higher, toward 12.4% by fiscal 2024. Therefore, we make no change to our AUD 14.60 per share fair value estimate despite soft organic volumes--which were a theme in fiscal 2019--that have persisted into early fiscal 2020. We anticipate a return to growth through the remainder of fiscal 2020. As a result, our full-year fiscal 2020 EBIT estimate is largely unchanged at USD 1,452 million. Amcor shares continue to screen as fairly valued.

We make no change to our long-term outlook or fair value estimate for narrow-moat Amcor despite delivery of soft fiscal 2019 earnings. We were underwhelmed by organic growth in both Amcor’s flexibles and rigids segments. Consequently, constant currency EBIT of USD 1,050 million, excluding the one-month contribution to earnings from Bemis, was approximately 7% short of our forecast. But this provides us with no cause for concern and we continue to expect growth in population and per capita income to drive organic top-line growth of approximately 3% over the long-term. We also maintain our positive view of the tie-up with narrow-moat Bemis. Synergy realisation is set to begin in earnest in fiscal 2020. We update our estimates to reflect Bemis’ contribution to the enlarged plastic packaging powerhouse and forecast fiscal 2020 EBIT of USD 1,444 million. Amcor screens as fairly valued at current share prices.

With anti-trust clearance now provided by the U.S. Department of Justice, or DOJ, the final obstacle in the tie-up of narrow-moat Amcor and narrow-moat Bemis has been eliminated. Amcor’s proposed remedy to U.S. anti-trust issues--the sale of certain U.S. Amcor assets--was sufficient to assuage DOJ concerns while not impacting the expected USD 180 million in deal synergies.