Brokers Rave About Pact

This story features PACT GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: PGH

– Growth, diversity and defensiveness
– High margin cash generation
– Asian expansion

By Greg Peel

“Pact with upside,” says Morgans. “Packed with opportunity,” says Macquarie. “Diversified, defensive and inexpensive,” says Credit Suisse. “Initiating coverage with a Buy rating,” says Deutsche Bank.

Yes, Deutsche could perhaps do with a more imaginative sub-editor, but the fact remains brokers are very keen on recently listed packaging company Pact Group ((PGH)) as an investment. Indeed, each of the four above brokers has initiated coverage of Pact over the past week. All of them has ascribed a Buy or equivalent rating.

Pact is the leading supplier of rigid plastic packaging and metal containers in Australia and New Zealand. Australia presently accounts for 71% of revenue and international (including NZ) for 29%. Within the international business is a growing exposure in Asia, currently representing 6% of revenue. If Pact is able to acquire Indonesia’s leading packing company Dynapack, as it is attempting to do, emerging market revenue will grow to around a 25% share of group.

Pact primarily converts plastic resin and steel into packaging and related products for customers in the sectors of food, dairy, beverage, personal care and other household consumables, chemical, agricultural, industrial and others. According to market research firm Smithers Pira, the global rigid plastics industry should increase at a compound annual growth rate of 5.3% over 2012-18, including Australasian growth of 4.0% per annum and Asian growth of 8.4% per annum. Pact is diversified and defensive, notes Credit Suisse, with 75% of revenue sourced from hundreds of food and consumer products customers within the region. Within most segments Pact is the market leader, and the company focuses on segments in which import competition is less viable.

Pact has guided to FY14 revenue of $1.2bn which would represent compound annual revenue growth of 16.8% from FY03, Macquarie notes. Earnings growth has been driven by acquisitions, organic growth, new product development, productivity and “relentless focus on costs”. Profits margins are lofty at 16.9% and have been consistently maintained at a similar level.

Brokers have set their initial valuations based on PE ratios for international peers and for closest local peer Orora ((ORA)), recently spun-off from Amcor, with a premium added above the more fibre/box oriented Orora. All expect PGH will trade below its discounted cashflow valuation, despite generating significant defensive cashflows, until the company has gained more of a track record. Pact only listed in December.

The FNArena database shows an initial consensus price target of $4.12, representing 18% upside to the last traded price. Given PGH listed within FY14 we need to go out to FY15 for a full year’s forecasts, which suggest earnings growth consensus of 10.4% for a 5.8% yield.

There is some risk that Pact may need to go to the market for additional equity were it to win the Dynapack bid.
 

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