Amcor

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

14 February 2017, 2:16 PM

Sectors Covered:

Industrials

1H17 result broadly in line with expectations

The Amcor (AMC) result overall was broadly in line with our expectations, with underlying EBIT up 1% to US$495.7m while underlying NPAT rose 1% to US$308.6m. The result was driven by growth from both the Flexibles and Rigid Plastics divisions, and came both organically and from recent acquisitions. The performance of AMC's underlying markets were mixed, with earnings from developed markets continuing to grow at a solid pace (+5%) while emerging markets experienced some challenges (+1%). EBIT margin grew 30bps to 11.1% which was a solid result in our view, owing to improved product mix and strong cost performance.

AMC's interim dividend of US19.5cps was above our forecast (US18.1cps). As expected, management maintained guidance for higher earnings in FY17 (constant currency).

Balance sheet and cash flow metrics should improve in the 2H

The balance sheet is becoming more stretched, with leverage (net debt/EBITDA) increasing to 2.9x (1H16: 2.5x) due to the acquisitions made over the past 12 months. While leverage is above management's target range of 2.25-2.75x, this should reduce in the 2H as acquisition earnings flow through. Interest cover (EBITDA) at 7.9x remains healthy but represents a deterioration from the previous corresponding period (1H16: 8.9x).

Free cash flow (after dividends) was -US$205.1m vs -US$155.5m in the previous corresponding period due to higher capex, higher interest costs and Flexibles restructuring charges. 2H17 should see strong cash generation with AMC maintaining guidance for FY17F free cash flow (after dividends) in the range of US$150m-US$250m (Morgans est: US$205m).

Minor changes to earnings forecasts

FY17F underlying EBIT remains broadly unchanged (-1%) given management guidance for both the Flexibles and Rigid Plastics divisions remain unchanged. FY17F underlying NPAT rises 3% to US$702m due to a reduction in net interest expense (in line with US$180-US$190m management guidance) and slightly lower tax expense. Given the higher-than-expected 1H17 DPS we have also increased FY17 DPS accordingly.

Investment view

Amcor is a high quality company with leading global market positions, defensive characteristics and a strong management team, but we think there are ongoing macro headwinds (FX, emerging markets slowdown) that could continue to weigh on the stock in the short term.

We maintain our Hold recommendation.

More information

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