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Destocking Remains Amcor’s Hobgoblin

Australia | Feb 08 2024

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

Amcor suffered volume declines in the first half which are set to carry into the second, given customer destocking and weak end-consumer demand.

-Amcor volumes declined by -9%
-Heavy destocking at year-end
-Weak consumer demand for discretionary products
-Guidance maintained, but analysts not so sure

By Greg Peel

Packaging multinational Amcor ((AMC)) posted underlying first half earnings below consensus forecasts, while earnings per share were in line thanks to a lower corporate tax rate. The company has maintained its core earnings per share guidance range for FY24 at US67-71c, which pleased the market on the day given weakness in first half volumes.

The key drag on earnings was a -9% decline in group volumes, including -10% in December, impacted by accelerated destocking in the month as customers reduced inventories ahead of year end. The rigids and flexibles divisions both saw -9% declines.

In flexibles, which accounts for around 75% of group revenue, the volume decline was driven by the healthcare category in all of North America, Europe and Asia, while for rigids the largest decline was in North American beverage volumes, which fell -14%.

About half of the group decline was due to customer destocking of excess inventory, Ord Minnett notes. The remainder was due to weaker end-consumer demand as household budgets became stretched by high interest rates. Households are currently spending less on discretionary goods and switching to lower-cost bulk items, which generally have less packaging.

Due to supply chain issues over 2023, healthcare customers stocked up on packaging. Consequently, customers ended up with an oversupply, and demand was reduced as excess inventory was reduced, in addition to lower demand from end-consumers.

But inventory can only get so low before it requires restocking, and Ord Minnett expects a stabilisation of inventory levels in flexibles and rigids in the second half.

More Weakness

Amcor's commentary it has "seen volumes improve in January relative to first half" was initially taken positively as signalling the move past peak volume declines and an improved outlook for the second half. However, later the company clarified it expects volumes to remain negative, declining mid-single digits in March quarter before improving to low-single digit growth in the June quarter.

This comes despite guidance in August 2023 that volumes would grow by a "low single digit" in the second half. Jarden notes any improvement in January is off a weak December, rather than signalling a move back into growth.

At lot thus rests on a pick-up in volumes in the June quarter if Amcor’s unchanged earnings guidance is to be achieved. There may yet be a tailwind from interest cuts in the US, although consensus now has the Fed making its first cut in May or June, rather than March as was previously expected, suggesting they’ll come a bit late.

This would make a recovery more of an FY25 story. Morgans suggests the earnings profile looks “brighter” into the June quarter, with momentum likely to carry into FY25.

Guidance Ambitious?

Morgan Stanley sums up a general view in noting Amcor offers defensive earnings, quality management with a strong track record, and a 4% yield. But the broker continues to see near-term volume softness at least through the next quarter and a still-modest growth outlook beyond that point. Morgan Stanley believes reaching the top half of guidance “looks increasingly challenging”.

And Morgan Stanley is not alone. Brokers have in general set their own forecast towards the bottom end of the FY24 guidance range.

Morgans (Add) is prepared to suggest the balance of risk is to the upside based on where the share price is trading.

While Ord Minnett (Accumulate) has a soft outlook for short-term volumes, this broker is positive on volumes longer term, forecasting improvement once customer destocking and trading-down are completed.

The remaining four brokers monitored daily by FNArena all have Hold or equivalent ratings. The consensus target has slipped to $15.41 from $15.48, ranging from Citi on $14 to Ord Minnett on $17.80.

Jarden, not monitored daily, has a Neutral rating and $14.40 target.

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