Amcor Confident In Berry On Top

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Amcor posted a solid quarter but all eyes are on the company’s proposed takeover of the larger Berry Global Group.

-Defensive Amcor posts decent quarter
-Sequential improvement in volumes
-Key catalyst the proposed Berry takeover
-Stock likely range-bound until the deal completes

By Greg Peel

Global packaging company Amcor ((AMC)) posted December quarter and first half FY25 earnings that matched market expectations, aided by falls in interest and tax expenses, reduced depreciation and amortisation charges, and lower corporate overheads, as sales revenue on a constant-currency basis eased by -1%.

There were no major surprises with first half underlying earnings per share (constant currency) growing by 5%. On a reported basis, the result was marginally softer than expected due to the stronger US dollar.

Earnings were driven by a further sequential improvement in volumes, which rose by 2.3% in the quarter, compared to 1.6% in the September quarter and 1.0% in the June quarter. A strong cost performance was partly offset by unfavourable price/mix.

Poor Health

Flexibles earnings (constant currency) rose 4% on the back of flat sales. The result was driven by volume growth in all key regions, despite continued destocking in healthcare, and benefits from cost-outs, partly offset by unfavourable price/mix.

Importantly, management said destocking in healthcare –a long-run hangover from covid– is now largely complete, although there might still be some residual destocking in pharmaceuticals in the March quarter. Volume growth in the sector is expected to return in the second half.

This should also support an improvement in price/mix, notes Morgans, given healthcare is a higher value segment.

Rigid Packaging earnings (constant currency) increased 6% despite sales falling -3%. The result reflected good cost management and growth in Latin America, Morgans suggests, despite consumer and customer demand remaining soft and variable in the North America beverage business, for which volumes fell mid-single digits.

Management reiterated FY25 guidance for underlying earnings per share of between US72-76cps, representing 3-8% growth in constant currency. Adjusted free cash flow guidance has also been maintained at between US$0.9-1.0m.

Leverage of 3.3x in the quarter was an improvement on the prior quarter (3.4x), and management reiterated its target for leverage to be “at or below 3.0x” by year end.

Guidance assumes low to mid-single digit volume growth, UBS notes, reflecting the end of destocking and increased promotional activity from customers, as opposed to a recovery in consumer demand.

Berry Good

Brokers agree the result was “solid”, and guidance is much as expected. But the result is but a mere sideshow to the main event that is Amcor’s proposed takeover of US packaging company Berry Global Group.

“Berry Global offers industry leading material science knowledge and manufacturing capabilities to help customers achieve their business and sustainability goals in a circular economy.”

This is no bolt-on acquisition. Berry’s market cap is greater than Amcor’s, leading to suggestions of a “merger” rather than a takeover.

Amcor is an operationally sound business with strong management, notes Ord Minnett. It operates, however, in a plastic packaging industry in which growth, particularly in the key US market, is proving harder to come by.

Enter Berry. An issue for investors will nevertheless be the greater skew to US ownership of Amcor post the Berry takeover. That proportion would increase to 74%, Ord Minnett notes, from circa 58% currently and may result in a share overhang given Wall Street’s propensity to value packaging stocks at lower metrics than the Australian market.

Management noted the merger with Berry is on track with the respective shareholder meetings to take place on 25 February. The transaction remains the key catalyst, suggests Morgan Stanely, albeit the close is not expected until mid-year.

Amcor is increasingly confident in the Berry acquisition in terms of strategic fit and synergies. The company has demonstrated a good track record of synergy delivery, Macquarie points out, referencing the prior Bemis and Alcan acquisitions.

Integration planning is “well under way”. Management noted it has increased confidence in realising its $650m synergy target, and that progress is being made in respect to regulatory approvals.

Macquarie finds that after a period of near-term consolidation, Amcor’s share price did well during the synergy realisation period for both Bemis and Alcan. Post deal close, management will be reviewing the portfolio for value-accretive divestment opportunities with targeted improvement in margins, returns and growth prospects.

Morgans has a different take. While the rationale for the deal makes sense and financial metrics look solid, Morgans suggests, given the size of the deal Amcor’s share price will likely be range-bound until it can prove it is meeting its targets.

Morgans notes when Amcor announced the acquisition of Bemis in August 2018, its share price was flat after one year and down -2% after two years. Morgans Stanley is also expecting a relatively range-bound share price until the deal concludes.

The Plodder

In Morgans’ (Hold) view, Amcor is a highly defensive business with global leading market positions and a good management team. The Berry Global merger will once again be transformative for Amcor, the broker suggests, following its merger with Bemis in 2019.

Combined with management commentary highlighting confidence in the second half, Ord Minnett (Hold) views the December quarter result as a solid outcome for a company that offers defensive exposure amid the broader economic uncertainty generated by the new US administration’s actions on tariffs and potential retaliatory measures by those trading partners in the White House’s sights.

Having noted Wall Street’s propensity to value packaging stocks at lower metrics than the Australian market, Ord Minnett suggests potentially offsetting that issue is the investment appeal of the Australian-listed shares given their discounted valuation versus other local defensive options, and the possibility Amcor captures the full US$650m of cost savings and revenue benefits it is targeting from the acquisition.

UBS’ (Neutral) FY25 earnings growth forecast of 5% is reflective of the company lapping weaker comparables, ahead of what this broker sees as an improving consumer backdrop into FY26. UBS’ Neutral rating is based on Amcor trading at a one-year forward PE of 13x, against a long-term average of 15x.

With Berry the key catalyst, Morgan Stanley maintains an Equal-weight rating.

Four of the six brokers monitored daily by FNArena covering Amcor have Hold or equivalent ratings. Macquarie is on Outperform, suggesting Amcor offers an attractive mix of growth, value and income. In a brief note, Citi also retains a Buy rating.

FNArena’s consensus target is $16.88.

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