Venezuela Divides Opinion On Amcor

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

-Venezuela an intermittent contributor
-Gains in flexibles in the medium term
-Acquisition strategy intact
-Yet will the Venezuelan effect spread?
 

By Eva Brocklehurst

A write-down of Venezuelan operations has divided brokers in their outlook on Amcor ((AMC)). The company announced the US$350m write-down would be taken in the FY16 accounts, blamed on issues with foreign currency and an increasingly volatile operating environment.

Amcor expects a minimal contribution from Venezuela to earnings in FY17. The company has countered the negative headline on Venezuela with a restructuring of its flexibles division amid plans to streamline operations and cut costs.

UBS dismisses the announcement regarding Venezuela as isolated and an extreme circumstance. Earnings estimates are lowered by 4% for FY17 as a result, which is partly offset by cost cutting initiatives for the flexibles division.

On a broader horizon, the broker believes the acceleration in the company's pace of acquisitions in FY16 is a sign Amcor recognises the need to offset weak underlying growth. The US$10bn Americas market is considered the logical avenue to take, given the fragmented industry and the company's under-representation in the region.

Deteriorating economic conditions in Venezuela mean it is increasingly difficult for Amcor to obtain US dollars and purchase raw materials on a consistent basis. The operations consist of six rigid plastics plants that generate 4% of group revenue. Ord Minnett observes this reality has meant only intermittent production at the facilities in the country.

The one-off charge relates to accumulated FX translation losses and a write off of the net asset position. Amcor has moved to mitigate earnings volatility by adopting a floating exchange rate. On a profit basis, the projected headwind to further earnings is US$20m.

Meanwhile in flexibles, the company is rationalising its manufacturing, reducing complexity and improving speed to market. The company will recognise cash costs of US$120-150m to rationalise the footprint and expects a 35% return on the investment by FY19.

Morgans takes a dimmer view of the developments in Venezuela, doubly downgrading the stock to Reduce from Add. Amcor is still envisaged as a high quality defensive concern with strong management and solid long-term growth opportunities but the broker suspects the problems in Venezuela will ignite concerns around emerging markets.

The company's track record may be excellent in that regard but Morgans does not envisage a positive catalyst on the horizon, suspecting the stock may come under pressure in the short term.

Venezuela is only a minor negative, in Deutsche Bank's opinion. The broker does not expect a material impact on either the balance sheet or dividends, nor does it expect this to significantly impede Amcor's ability to re-invest or undertake acquisitions. Hence, a Hold rating is maintained.

Macquarie sticks by an Outperform rating, also believing Venezuela is a special and isolated case given unusual FX controls. The broker remains comfortable with the company's broader Latin American business, highlighting the larger opportunity post the acquisition of Alusa.

The broker also believes the restructuring initiative in Europe is positively directed towards margin and earnings growth. While acknowledging Europe has low-growth markets in the western sector, there are some initiatives with promise, Macquarie notes, including the shift in equipment to lower cost and higher growth regions in the east.

The broker observes pull-backs in the share price have traditionally provided attractive entry points in the last few years and does not consider this time the situation is much different. Morgan Stanley begs to differ, suspecting there is an increased risk in the emerging markets business.

Challenges across Amcor's business are considered broader than just Venezuela. While restructuring gains in flexibles are expected down the track, the broker suspects, in the near term, this could negatively affect profit by 12% in FY16 and 8% in FY17. Morgan Stanley continues to believe the underlying risks are greater than the market appreciates and the stock should be trading at a lower multiple as a result. Underweight retained.

CLSA maintains the market over-reacted to the news, with around $1bn wiped off the market cap in a single session. Management's efforts to better align its footprint and lower the cost base are lauded, given the low growth environment. Moreover, the leadership position in flexibles should ensure the business is nimble enough to make the adjustments.

CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, is encouraging investors to take advantage of the sell-off, highlighting the ability to deliver consistency on a 10-15% total shareholder return basis and reiterating a Buy rating and $18.15 target.

Credit Suisse, too, is unswayed by the news , despite noting that Amcor is probably bringing in around US$100m in resin into Venezuela and, to the extent the company cannot convert Venezuelan bolivars into US dollars, there is the risk of an accumulation of bolivar working capital. This could produce further devaluation. Hence, there is an ongoing risk to manufacturing in the country.

On the flexibles restructuring, the broker highlights the 35% return expected is significant and far above Amcor's usual investment hurdle of 20%. 

The consensus target for Amcor on the FNArena database is $14.98, suggesting 2.7% in upside to the last share price. Ahead of the news this was $15.44. Targets range from $12.07 (Morgan Stanley) to $17.50 (Macquarie). There are two Buy ratings, four Hold and two Sell.

See also, Brokers Forgive Amcor Acquisition on April 19 2016.
 

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