Amcor: A disruptive quarter

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

04 November 2021, 8:00 AM

Sectors Covered:

Industrials

• AMC’s 1Q22 result was slightly below our expectations at the EBIT line but above our forecast at the underlying EPS line. On a constant FX basis, EBIT rose 7% (- 1% vs MorgansF) while underlying EPS increased 12% (+2% vs MorgansF).
• Both Flexibles and Rigid Packaging were impacted by supply chain issues, with Rigid Packaging in North America hit particularly hard by raw materials shortages, higher costs and operating inefficiencies.
• Despite the supply chain challenges, management has reiterated FY22 guidance for constant FX underlying EPS growth of 7-11%.
• We make minor adjustments to earnings forecasts with FY22-24F EBIT decreasing by 1% while underlying EPS remains virtually unchanged due to lower net interest expense. Our forecasts imply FY22 (constant FX) underlying EPS growth of 9%.
• Our target price moves to (login to view) and we maintain our Add rating.

Flexibles had a good result

Flexibles revenue (constant FX) rose 1% and EBIT increased 8%. The result reflected favourable price/mix and good cost out despite slightly lower volumes as raw materials shortages constrained growth in some categories.

Volumes in North America were up low single-digits (growth in medical, condiments, liquid beverage, and confectionery was partly offset by lower cheese, coffee and home and personal care demand) but were lower in Europe (pet food, medical, premium coffee and confectionery grew but was more than offset by weaker film and foil rollstock, snack food and pharmaceutical demand).

Volumes in the Asian emerging markets were up mid single-digits while Latin America was lower.

Rigid Packaging was hit harder by supply chain disruptions

Rigid Packaging was significantly impacted by supply chain challenges in North America. While revenue (constant currency) increased 1% on slightly higher volumes, EBIT was down 15% reflecting raw materials shortages, higher costs, operating inefficiencies and constrained sales.

This is despite underlying demand levels remaining elevated and higher earnings in Latin America. 

Encouragingly, management anticipates the supply chain disruptions in North America to improve through 2H22 as more capacity comes online and supplier specific issues (e.g. plant fires) are resolved.

Outlook guidance unchanged

Management has reiterated FY22 outlook guidance for: Constant FX underlying EPS growth of 7-11% (or reported EPS of US79.0-81.0cps assuming current FX rates prevail for the remainder of FY22); Underlying FCF of US$1.1-1.2bn; and ~US$400m worth of share buybacks (US$64m was purchased in 1Q22).

Changes to earnings forecasts

We make minor adjustments to earnings forecasts with FY22-24F EBIT decreasing by 1% while underlying EPS remains virtually unchanged due to lower net interest expense.

Our forecasts imply FY22 (constant FX) underlying EPS growth of 9% (or reported EPS of US80.4cps) and underlying FCF of US$1.17bn.

Investment view

Overall, we think it was a reasonable 1Q22 result given the major supply chain disruptions experienced during the period. We take comfort in underlying demand remaining strong, the challenges being largely expected and planned for by management, and the reiteration of FY22 guidance.

AMC is currently trading on 15.8x FY22F PE and 3.8% yield. We continue to see the valuation as attractive for a highly defensive business with strong global market positions and a well-regarded management team. We therefore maintain our Add rating with our PE-based target price moving to (login to view).

Risks

Key downside risks include a rise in the AUD/USD, fall in the EUR/USD, higher-than-expected costs and a downturn in the European, North American and Emerging Market economies.

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