Amcor Defies Weak Economy

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

 – Amcor AGM commentary as expected
 – Results in minor changes to earnings estimates
 – Defensive earnings and solid yield seen as attractive
 – Buy rating still the majority among brokers

By Chris Shaw

Annual general meeting commentary from packaging manufacturer Amcor ((AMC)) contained no surprises, the company indicating earnings are tracking in line with expectations outlined with full year results in August. This is despite still difficult end market conditions.

The update implies Amcor will achieve organic growth for FY13 of around 5% in Australian dollar terms according to Macquarie, this despite the challenges for the Australian operations posed by a strong currency and rising costs. This has resulted in slightly softer than expected volumes, which Amcor will attempt to counter by an increased focus on operating costs.

Offsetting the difficulties in Australia has been a strong start to the year for the flexibles operations, which account for 50% of Amcor's total sales. In Macquarie's view this highlights the defensive qualities of Amcor's businesses.

A highlight for Deutsche Bank was management's indication free cash flow will continue to improve. This cash flow will be directed to organic growth opportunities and acquisitions, particularly those that expand the company's footprint in emerging markets and that add new technologies.

If no suitable acquisitions can be identified there is potential for excess cash to be returned to shareholders by way of higher dividends and/or share buybacks in the view of Deutsche.

On the back of the commentary from management brokers have made minor changes to earnings estimates, largely to account for changes to foreign exchange assumptions. Consensus earnings per share (EPS) forecasts for Amcor according to the FNArena database now stand at 54.6c for FY13 and 62.6c for FY14.

Changes to forecasts have prompted some changes to price targets, the largest adjustment coming from JP Morgan who lifts its target for Amcor to $8.25 from $7.60. The consensus price target according to the database has risen to $8.11 from $8.02, which implies upside of around 4% relative to the current share price.

This lack of share price upside relative to targets suggests the stock is not particularly cheap, Macquarie noting Amcor at present is trading on a market multiple of around 14 times FY13 earnings. But when a 5% dividend yield (partially franked) is added total shareholder return rises to around 10%, which Macquarie suggests is attractive given the reliable nature of Amcor's earnings. 

This is enough for Macquarie to rate Amcor as Outperform. A majority agree, as the FNArena database shows Amcor is rated as Buy four times, Hold three times and Sell once. JP Morgan is among the Hold ratings, noting while the reiteration of previous guidance is a positive given recent downgrades to 1H13 expectations in the market, the stock appears reasonably valued at current levels on a sector-relative basis.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms