Despite Constraints, Amcor Remains Resilient

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Despite the challenges to raw materials supply in recent months, Amcor is being lauded for its ability to manage costs and deliver a robust outlook for FY22

-Support throughout FY22 coming from Bemis synergies, organic growth
-Amcor likely to exceed its original cost synergy target for Bemis
-Sustainable packaging considered the largest organic opportunity
 

By Eva Brocklehurst

Amcor ((AMC)) has managed to stave off the inflation that has been widely evident in resin pricing as well as deal with supply constraints, producing a robust view on the outlook for FY22.

Packaging volumes were fairly flat in the September quarter with comparable sales growth occurring largely on the back of optimising price and mix. First quarter underlying earnings per share (EPS) of US17.7c were up 12% and Amcor has reiterated guidance for growth of 7-11% in constant currency terms.

This is supported by organic growth, Bemis synergies and the benefits of the buyback. Price and mix had a favourable impact, reflecting growth across a range of high-value end markets, Macquarie notes.

Morgan Stanley commends Amcor for its ability to manage the widespread pressures on its supply chain, highlighting a meaningful recovery of costs in response to higher resin prices.

The company expects the supply chain constraints that are currently occurring in North America will improve yet UBS suspects volume growth will largely be skewed to the second half.

Morningstar expects minimal growth in volumes in both flexibles and rigids in FY22 and FY23 as at-home consumption normalises to pre-pandemic levels. Labour and raw material shortages in North America could influence volumes over the full year and this is taken into consideration.

Nevertheless, Morningstar forecasts growth in underlying EPS in FY22 of around 11%, at the top end of the guidance range of US79-81c.

The analysts believe benefits from the Bemis integration are continuing to transform the business and allowing Amcor to anticipating exceeding its original cost synergy target of US$180m by the end of FY22. Morningstar expects US$200m in total Bemis cost synergy realisation.

Flexibles

The flexibles business generally takes 3-4 months to pass through the lag in resin costs and emerging markets have been even longer at around six months, although Macquarie observes the gap is now closing, noting the company emphasised it was being more proactive in managing raw material volatility.

US petrochemical plants have started to catch up to demand, the broker points out, and supply should improve in the first half, which means resin prices should fall from current levels albeit remain elevated.

Amcor considers sustainability its largest opportunity organically, expecting its products will be fully recyclable or reusable by 2025. Macquarie cites the risk that sustainability may be constrained by lack of recycled resin and as a result delay the company's ambitions.

Credit Suisse believes Amcor has led the field in managing raw material inflation and a positive shift in mix in geography, customer and some product categories has assisted margins in the flexibles division.

Costs have been recovered via price increases and while raw materials such as aluminium have had limited allocation in the quarter the supply is improving. The broker asserts protein packaging remains the key growth opportunity. UBS also highlights the favourable product mix towards higher-margin medical, pet food and the coffee pod product.

Rigids

In rigids the business is operating at full capacity because of higher demand and the supply constraints. Credit Suisse assumes the tight conditions will moderate during the remainder of FY22, noting Amcor is adding capacity and building inventory.

UBS considers the challenges are more pronounced in the rigids division as quarterly earnings (EBIT) declined -14%. PET raw material shortages in North America meant customer demand was difficult to meet and this resulted in manufacturing inefficiency.

Defensive

The quarterly result was "dependable" with a combination of a strong dividend yield and active buyback, Morgan Stanley asserts. The fact Amcor has reiterated guidance is a positive and a vote of confidence in the outlook, the broker adds, assessing the stock is attractive at a meaningful discount to defensive Australian peers.

Macquarie, too, likes the defensive growth qualities, noting the stock is trading around -6% below its traditional earnings correlation. The PE of 0.81x relative to the market is below the 10-year average of 1.05x albeit similar to the 2-year average.

UBS remains attracted to the company's leading position in packaging markets globally as well as the significant scale that supports earnings growth and cash flow, despite the volatility in supply and pricing.

Cash generation should pick up in the second quarter and again in the fourth quarter, Jarden suggests, as these are the seasonal peaks. Overall, the broker forecasts US$1.1bn in free cash generation in FY22, in line with guidance for US$1.1-1.2bn. As a result scope is envisaged for further capital management or bolt-on acquisitions out to FY24.

The broker, not one of the seven monitored daily on the FNArena database, has a Buy rating and $18.10 target. The database has five Buy ratings and two Hold. The consensus target is $18.27, signalling 10.7% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.0% and 4.2%, respectively.

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