Amcor: Toughing it out

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Alex Lu
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By Alex Lu
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Date posted:
03 February 2022, 8:30 AM
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  • Amcor's (ASX:AMC) 1H22 result was slightly below expectations, with underlying EBIT rising 4% to US$769m (-3% vs MorgansF and -1% vs Visible Alpha consensus) and underlying EPS increasing 8% to US35.8cps (-1% vs MorgansF and in line with Visible Alpha consensus).
  • Key positives: Group volumes rose 1% and would have been higher if not for supply chain constraints; Price/mix was positive; ROFE increased 100bp to 16%; Additional US$200m buyback announced; FY22 guidance was unchanged.
  • Key negatives: Both Flexibles and Rigid Plastics margins were lower; Challenges related to raw materials, transport and energy have persisted but improved in 2Q22 vs 1Q22; FCF of US$105m was down materially on the pcp (US$276m) due to the timing impact of higher raw material costs on working capital.
  • Management has reiterated FY22 guidance for constant FX underlying EPS growth of 7-11% (MorgansF +9%).
  • We decrease FY22F underlying EBIT by 2% and underlying EPS by 1%.
  • Our target price falls to (login to view) and we maintain our Add rating. We remain confident in the defensiveness of AMC’s business, its capacity to pass on higher costs, and management’s ability to navigate through the current difficult operating environment. Trading on 15.2x FY22F PE and 4.0% yield we continue to see the valuation as attractive.

Flexibles earnings growth partially offset by Rigid Packaging weakness

Flexibles EBIT increased 6% to US$691m, which was 4% below our forecast. EBIT margin fell 60bp to 12.9% due mainly to the pass through of higher raw material costs during the period.

However, excluding the impact of raw materials, EBIT margin rose 70bp, which was a strong outcome in our view reflecting favourable price/mix and good cost control.

Rigid Packaging EBIT fell 13% to US$117m, which was 5% below our expectation. While sales rose 4% (3% volume growth and 1% favourable price/mix), earnings were negatively impacted by supply chain disruptions and shortages of key raw materials resulting in operating inefficiencies and higher costs.

Encouragingly, conditions are improving with management expecting Rigid Packaging earnings to return to growth in 2H22 (MorgansF +4%).

Underlying demand remains robust

Despite the difficult operating environment, one of the key takeaways from the result was underlying demand remains solid. AMC’s group volumes increased 1% in the half (Flexibles volumes were flat while Rigid Packaging was up 3%) and management said would have been 1-2% higher if not for supply chain constraints.

This bodes well for further volume growth when the operating environment improves.

In addition, AMC said it was yet to see a dampening effect on consumer demand from the price increases implemented by the industry with packaging generally a small part of the overall product cost.

FY22 outlook guidance maintained with size of buyback increased

AMC has maintained FY22 guidance for constant FX underlying EPS growth of 7- 11% and underlying FCF of US$1.1-1.2bn.

The key change was an additional US$200m being allocated to share buybacks (US$600m vs US$400m previously), although this is not expected to benefit EPS growth until FY23 as there will be no material impact on the weighted average number of shares outstanding in FY22.

Changes to earnings forecasts and investment view

FY22F/FY23F/FY24F underlying EBIT changes by -2%/-1%/-2% while underlying EPS changes by -1%/+1%/0%. On a constant FX basis, we continue to forecast 9% underlying EPS growth in FY22.

Our PE-based target price decreases to (login to view) and we maintain our Add rating.

Trading on 15.2x FY22F PE and 4.0% yield we continue to see the valuation as attractive and take comfort in underlying demand remaining solid and the reiteration of FY22 guidance.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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