Australia | Oct 20 2006
By Chris Shaw
The emergence of private equity players looking for acquisitions on the Australian market has given a boost to the share prices of a number of underperforming companies, Amcor (AMC) being one of them. The stock fits the bill for a private equity target in many ways, as it is a turnaround story but with enough of a time lag before the improvement becomes evident so that until recently the recovery had not been priced into the stock.
This changed when rumours of a bid surfaced and the stock moved from well below $7.00 to around $7.50, but as attention has shifted to other candidates the stock has drifted off in recent sessions. Austock Securities takes the view while rumours of a potential bid helped the share price the improving fundamentals are an underappreciated part of the story as well.
While it points out earnings for the current half year are likely to be below the pervious corresponding period, the broker expects from the second half of this financial year onwards earnings will begin to show significant improvement.
It rates the company as Buy with a price target of $7.70, its positive stance supported by what it expects will be the benefit to earnings of not only the recent easing in energy costs but also improving fundamentals in the company’s PET operations.
One key in this regard is management’s success in achieving reduced pricing concessions, with prices now set to fall by 0.3% annually compared to the previous rate of 1.5%, which effectively acts as a price increase for the company. The broker expects the most obvious impact will be in the US market, where it sees the company as recording a better than flat profit result for the division this year.
Also helping in this regard will be management’s decision to walk away from low margin deals, the focus turning to more specialised contracts where margins are higher. The broker sees this as producing stronger earnings before interest and tax contribution even assuming flat sales in its general PET operations. The Custom PET division is expected to significantly increase sales, management targeting a doubling by 2010, though the broker has been more conservative and factored in an increase of 65%.
The Flexibles division has been a better performer in recent years and the broker expects this to continue. The European operations have lagged the US though, so with the company looking to adopt some of its American processes into the European operations the broker sees upside as likely. It estimates an improvement of as much as $33m is possible from the combination of lower energy prices and restructuring benefits, this before factoring in any organic growth.
A turnaround in Mexico is also in the offering, as it notes the company has completed what was a costly restructuring program, though it is now well placed to take advantage of what the broker sees as significant growth opportunities. Consolidation throughout Latin America is also a possibility, the broker suggesting the company is likely to involve itself in any significant industry restructuring.
The company’s Australian operations have recently lost market share in what is a declining market overall, but the broker expects the recently announced restructuring program, which will see more than $300m invested, should produce a solid improvement in pre-tax earnings by FY10.
Compared to the broader market Austock’s estimates are somewhat aggressive, as its earnings per share forecast for FY08 of 64.9c stands more than 30% above market consensus of 49.5c and a median estimate according to Thomson One Analytics of 52c. As the broker points out, a good portion of the difference can be attributed to interest expenses and tax, as before these are factored in its forecast for earnings is $908m compared to consensus of $822m.
Assuming it is on the mark with its estimates the broker sees good potential share price leverage, as it notes the stock is under-owned by domestic institutions.
The broker is somewhat out on its own with its positive view as its Buy rating is in contrast to the ratings of the leading brokers and equity researchers. The FN Arena database shows the major brokers rate the stock as Hold five times and Sell four times, with an average price target of $6.52 compared to Austock’s $7.70. Thomson One Analytics shows a median price target of $6.85.
Amcor shares today are weaker, at 12.00pm the stock was down 17c at $7.27.