-Amcor well placed for growth plan
-Plenty of options in regions and segments
-Focus on emerging markets
-Good flexibles potential

By Eva Brocklehurst

Packaging expert Amcor ((AMC)) recently briefed investment analysts and the message was clear - we know our business and we're here to perform. According to JP Morgan this should provide comfort for the market, particularly those with an investment case based on earnings certainty with moderate growth. There was a little re-jigging of forecasts but mostly brokers came away with the belief that the company was well managed.

Amcor has the luxury of picking and choosing regional markets and product segments which will drive growth. In this, the briefing paid attention to emerging market opportunities. CIMB notes, in this area, while synergies are often less obvious, management sees benefits equivalent to about 5% of sales simply by implementing its established processes. Emerging markets have grown to represent about 20% of Amcor sales but the company is still under-represented. However, CIMB has welcomed the company's desire to avoid growth for growth's sake. Macquarie also thinks this discipline makes Amcor interesting. Acquisitions are a key part of growth plans, but a minimum 20% return on capital is required. The brokers believe there is plenty of scope to achieve this. Macquarie notes emerging market multiples are higher at 8-9 times earnings with typical synergies around 5% of sales and high volume growth. Developed market options tend to be larger in size, with 6-7 times earnings a typical multiple, with higher synergies at 10% of sales but lower growth.

The other area the company flagged for growth is flexibles packaging. Its Flexibles Asia Pacific will focus on China and South East Asia. Deutsche Bank notes Amcor already has an enviable blue chip customer base here, such as Coca Cola, Kraft and Unilever. According to Amcor, its top 10 customers in the region allocate around 25% of their flexible packaging purchases to Amcor and represent 30% of the company's revenue in the region. However, the company is being careful in this segment too. Japan and South Korea are two of the most sophisticated packaging markets with firmly entrenched domestic players, and hence, a low priority for Amcor. The company will instead leverage the Asian footprint to import niche products. Deutsche believes China and India have strong potential as more sophistication in packaging use is expected from the rapidly developing middle class. Macquarie sees flexibles as a very good business. Despite a big lift in earnings margins in the last two years, from 9% to 11.3%, the broker considers another step change could be driven by simplified procurement, cost improvement and an expanded product range. This implies the targeted 11-12% earnings margin range could be conservative, if this is achieved.

The key to mature market growth is innovation and research & development, according to CIMB, and Amcor has ample scale to focus on operating efficiencies and become a low cost supplier. Citi has also given this a tick, saying the strategy update reinforces confidence in the growth outlook despite the economic headwinds. It also praises the attractive investment qualities, including strong dividend yield (5% is the FY13 estimate in FNArena database), and attractive valuation - around 14 times estimated FY13 earnings.

JP Morgan has noted, to deliver high single digit to low double digit earnings growth, acquisitions of around $300m a year will be required. However, Amcor achieved this target in FY12.  Where Amcor is fortunate is that it has a number of growth options to spread the risk. Macquarie finds a good point in the industry structure in Australia, where it is number one or two in all segments (cans, glass, fibre), and additional opportunity in quality improvements and sustainability benefits (light weight, carbon footprint). Deutsche Bank also notes Amcor has a strong position in Australia and New Zealand and the Aperio acquisition is a game changing opportunity.

One area of concern, raised by JP Morgan, is that consensus estimates appear to be underestimating the amount of capital reinvestment that will be required to deliver earnings growth. However, the broker does accept the company's claim that increasing the proportion of flexibles sales from high performance products, as well as simplifying the production and input complexity of products, will help increase margins. JP Morgan raised its target price marginally to $8.35. Any depreciation in the Australian dollar would result in higher earnings translation while improved economic conditions in Europe and the US will be welcome. Further upside could come from a reduction in PET resin, glass and aluminium input prices. Risks are the reverse: an appreciation of the Australian dollar, deteriorating economic conditions in the US, Europe and Australia and an increase in PET resin, glass and aluminium input prices.

What is not so great, according to Macquarie, is that the Australasian business still structurally challenged by the high Australian dollar. Cartonboard earnings will be down in FY13 from decoupling of recycled paper prices (low) and A$ (high). The broker said Amcor needs to pull hard on the cost levers to deliver targeted flat earnings for year. Other headwinds include low productivity and introduction of the carbon tax (although Amcor has passed through its cost to customers). Plain packaging (tobacco) laws introduced in Australia are not considered a material threat as packaging complexity is not significantly reduced. Amcor does not see plain packaging as a threat in other markets either, as Europe has only just started discussing the potential introduction of graphic health warnings.

CIMB, Deutsche Bank, Macquarie and Citi believe the business deserves a Buy rating on FNArena's database. Others such as JP Morgan, UBS and BA-Merrill Lynch retain a Hold rating. Credit Suisse has a Sell. The consensus target on FNArena's database is $8.21, within a range of $7.70 to $8.75. The bottom of that range is held by Credit Suisse. The broker did not update, as yet, from the investor briefing but has based its Sell rating partly on the persistent currency headwinds. The broker also believes the defensive nature of the stock means it will be left behind by those investors seeking short term returns.
 

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