Amcor

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

22 January 2016, 10:02 AM

Sectors Covered:

Industrials

Key points

• Amcor (AMC) reports its 1H16 result on 15 February.
• Challenging conditions in emerging markets and currency headwinds are expected to weigh on 1H16 earnings.
• We reduce FY16F EBIT by 6% to US$1,033m.

1H16 expected to be challenging

We forecast 1H16 EBIT of US$468m, implying ~10% growth on the pcp due largely to a slowdown in growth in emerging markets, the absence of one-off benefits in the pcp and the negative impact of currency translation. Partially offsetting this should be some cost relief from lower resin prices. On a constant currency basis, we forecast 1H16 EBIT to be 1% higher.

Given the highly defensive nature of AMC's business, we expect underlying volumes to remain fairly stable despite the subdued global economic environment. We believe any potential weakness in emerging markets should be offset by volume growth in North America and stable volumes in Western Europe.

Solid Rigid Plastics growth offset by Flexibles weakness

For the Flexibles division, management has guided to modest constant currency growth in FY16, with a challenging 1H. In constant currency terms, we expect 1H16 Flexibles EBIT to fall by 1% to €306m. On a reported basis, we expect EBIT to drop by 14% to US$340m. The outlook for the Rigid Plastics division is more positive, with guidance for solid growth in earnings in FY16. For 1H16, we expect Rigid Plastics EBIT to rise by 6% to US$147m.

Changes to earnings forecasts

Update to earnings forecasts see FY16F EBIT fall by 6% to US$1,033m, while underlying NPAT drops 7% to US$653m. The downward revisions largely reflect changes to our growth assumptions for the Flexibles division given the weaker global macroeconomic environment and updates to our currency forecasts. 

On a constant currency basis, we forecast FY16 EBIT growth of 2%. Given the drop in earnings we also reduce our FY16F DPS to US39.3cps (from US41.9cps), maintaining a 70% payout ratio.

Investment view

Despite a potentially challenging 1H16 result, we remain confident in AMC's business model in the medium to long term. We are attracted to AMC's defensive growth profile, international exposure, high financial returns, experienced management team and strong cash flow generation.

We maintain our Add recommendation.

More information

I discussed the outlook for the packaging sector in a presentation to the Morgans network this morning (Friday 22 January). You can watch this presentation below:

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