Under the Spotlight AUS: Amcor (AMC)

Wherever you’ve spent your Christmas and New Year break, Amcor ($AMC) would have been there. In the fridge, pantry, laundry and even the bathroom. 

Amcor is a leading consumer packaging company with a roster of clients that includes brands like Kraft Heinz ($KHC), Unilever ($UL) and Nestle ($NSRGY). It does it all: from plastic drink bottles, coffee pods and packets for cosmetic wipes to the plastic wrap around your favourite cut of meat.

One of Australia’s global champions, Amcor has come a long way from the 1860s, when it started as the first paper mill in Victoria, on the banks of the Yarra River. Its expansion accelerated in 2010 with the US$1.94b acquisition of Alcan’s packaging business, then a US$6.8b merger with Bemis in 2019. Amcor is now set to further grow its scale through a US$8.4b merger with Berry Global ($BERY). 

Berry picking

The merger will create a consumer and healthcare packaging giant with revenues of US$24b and EBITDA of US$4.3b. Amcor’s international strength in flexible packaging complements Berry’s leading presence in containers and closures. The humble yoghurt container demonstrates the benefits of the deal: Berry makes the container and Amcor produces the lid.

Analysts will focus on the progress in extracting synergies, targeted at US$650m, with cost savings accounting for US$530m of that. Amcor expects 40% of efficiencies to be delivered in the first year and a total of 80% by the end of the second year. The company’s larger scale will deliver procurement cost savings, especially for raw materials like resin used in bottles. Amcor’s track record in extracting costs from past deals provides analysts comfort on its synergy targets.

The company argues the deal will deliver stronger investor returns, estimating an immediate EPS increase of 35% and an annual cash flow above US$3b once the merger completes in mid-2025. In the longer term, Amcor management’s ‘Shareholder Value Creation Model’ expects the current EPS growth target of 5%-10% to move towards 10%-15%. There should be around US$1.1b of cash flow to boost dividends, plus over US$1b available for acquisitions or buybacks.

The issue for Amcor is whether it can translate these targets into stronger share price performance. While its shares are up 5.8% over the past year, they’re down 1% over the past five years since buying Bemis at a 25% premium (compared to 11% for Berry). Analysts see the flat performance as a reflection of the move in primary listing to the NYSE ($AMCR) as part of the Bemis deal. Basically, Amcor became a small fish in a big pond rather than standing out as one of the ASX’s larger companies. The stronger EPS growth on its sights could spark a rerating of Amcor shares, which trade at a premium multiple to other packaging stocks.

Under the lid

While Amcor works to bed down the deal, its Q1 earnings highlighted its ability to drive earnings growth through good cost management. Volumes increased 2%, while EBIT and EPS increased 3% and 5% respectively. Its EBIT margin rose half a percentage point to 10.9%. 

The results, which were released before the merger announcement, saw Amcor reaffirm full year guidance. EPS growth of between 3% and 8% is expected; the top end of that range would fit within the current targets in its shareholder value model. 

Although the flexible packaging business saw higher volumes in Q1, there is continued destocking in healthcare and different conditions across key markets. Consumer and personal care volumes were lower in North America, and snacks and confectionary volumes fell in Europe. Asia volumes were supported by growth in China and India. The rigid packaging unit saw lower North American beverage volumes due to weak consumer spending.

Surprise package

Amcor’s merger with Berry makes great strategic sense by delivering a suite of packaging for products found on supermarket shelves and homes around the world. The resulting company will need to prove to investors it can translate faster growing earnings into a faster moving share price.

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.