Amcor Offers Growth, Synergies And Capital Management

This story features AMCOR PLC. For more info SHARE ANALYSIS: AMC

– Amcor result better than consensus expectations
– Synergies ahead of schedule, continue to drive earnings
– Buyback announced, more capital management expected
– Brokers now unanimous with Buy ratings

By Chris Shaw

Consensus expectations for full year earnings from packaging group Amcor ((AMC)) were for a net profit of around $539 million, so the result of $570 million was clearly better than expected. 

As UBS points out, the result was driven by the earlier delivery of synergies related to the Alcan acquisition. RBS Australia notes Amcor generated synergy benefits of $142 million FY11, which compared to a target for the year of $100-$120 million. This means Amcor has achieved the bottom end of the synergy target range of $200-$250 million in total gains a year ahead of schedule.

As well, management has announced a $150 million share buyback, the capital management initiative also coming a year earlier than RBS had anticipated. The buyback suggests to RBS that management is confident in the earnings and operating outlook for Amcor, while as Credit Suisse notes even allowing for the buyback the balance sheet remains in solid condition.

Further capital management initiatives are possible as BA Merrill Lynch estimates in FY13 Amcor should generate free cash flow of more than $800 million. With target gearing of 45-50%, this offers significant scope for more capital returns in BA-ML's view.

Citi agrees, estimating Amcor could announce capital management moves totaling $1.0-$1.5 billion over the next 2-3 years given increasingly strong cash flows.

Looking forward, synergies from Alcan should continue to be the key growth driver for Amcor, with Credit Suisse remaining above management's guidance in terms of expected synergies in coming years. Risk is to the upside if management can execute properly, notes Credit Suisse.

Post the profit result brokers have made relatively minor adjustments to earnings estimates. Citi lifted estimates for FY12 slightly to account for the buyback but reduced forecasts in FY13 to factor in changed currency expectations.

RBS has gone the other way and trimmed its numbers by about 5% in FY12 given changed currency estimates, while UBS has also made minor cuts to its forecasts. Consensus earnings per share (EPS) estimates according to the FNArena database stand at 53.8c for FY12 and 63.1c for FY13, compared to a result of around 46c for FY11.

There has been one change in rating for Amcor post the profit result, UBS upgrading to Buy from Neutral on valuation grounds. As UBS notes, at current levels Amcor is trading at a discount to the Industrials sector despite a strong and visible earnings growth outlook and scope for additional capital management moves.

The upgrade brings UBS into line with the rest of the market, as the FNArena database now shows a perfect eight-for-eight Buy ratings for Amcor. As Credit Suisse notes, Amcor should be able to continue to lift group earnings through acquired earnings, related synergies and capex growth, even assuming little in the way of organic growth.

The consensus price target according to the database is $7.90, down slightly from $8.05 prior to the result. Price targets range from $7.50 to $8.50.

Over the past year the stock has traded in a range of $5.87 to $7.43, the current share price implying upside of around 17% to the consensus price target in the FNArena database.

 

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