Acquisitions continue at pace
Pact Group (PGH) has entered into an agreement to acquire two businesses in Asia (CSI Asia and GPC Asia) for A$142m, representing a CY17 EV/EBITDA of 7.5x pre-synergies. CSI Asia specialises in plastic caps and closures while GPC Asia has a presence in Chinese food, health, supplements, nutrition and automotive lubricants markets. Management believes the acquisitions will provide PGH with further scale and a broader range of opportunities to grow in the Asian rigid plastic packaging market. The acquired businesses have seven manufacturing sites in China, South Korea, Nepal, India and the Philippines and is expected to increase PGH's revenue in Asia from approximately A$50m to approximately A$200m per annum.
PGH has also agreed to acquire ECP Industries (WA-based IBC reconditioning business) for A$11.7m, representing an FY17 EV/EBITDA of 4.7x.
Acquisitions to be funded via a A$176m equity raising
To fund the transactions, PGH has also announced a A$176m equity raising via a 1 for 9 entitlement offer at A$5.28 per share. Net proceeds from the offer will be used to fund the acquisitions, cover transaction costs and provide flexibility for further investment in growth projects.
Signs of organic growth but energy costs remain a headwind
Management noted the first four months of trading in FY18 has seen some early signs of organic growth with sales trending in the right direction despite a slow start to the New Zealand dairy season. While recent acquisitions and the new crate pooling business is performing to management expectations, energy costs have increased significantly and PGH has had to invest in efficiency programs to mitigate these costs.
Management now expects 1H18 EBITDA to be broadly in line with the previous corresponding period by a stronger 2H driven by a full contribution from recent acquisitions and crate pooling contributions.
On the back of the trading update and factoring in the acquisitions and equity raising, our FY18F EBIT increases 1% to A$191.9m while underlying NPAT rises 2% to A$108.8m. However, a higher share count sees FY18F earnings per share fall 6% to 33.5 cents per share.
Our PE-based share price target reduces slightly and we maintain our Hold recommendation.
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