ANALYST’S NOTE

Amcor (AMC) FY18 results as expected, saw heavy emphasis underlie the cost component of the business, with hefty raw material expenses (specifically in aluminium and liquids) afflicting margins across the board.

However, management note it was a time of recovery, with strategic cost initiatives tracking well and input costs being successfully passed onto customers. A restructuring plan for the highly seasonal Rigid Plastics business was also announced where we can expect “facilitated production and reduced overhead costs” in the segment which largely under-performed due to cost hikes over the period.

The Bemis acquisition was also touched upon; however information was largely reaffirmed with no material news being released on top of our prior note where we explored the details of the transaction. We maintain our Buy recommendation.

We appreciate there are a number of things on AMC’s plate right now, including the transformation acquisition of Bemis. However, we take comfort from the undemanding valuation.

• FY18 Key Results: 1. Group profit before interest & tax (PBIT) was down -0.2% (-3.3% in constant currency terms) as a result of increasing operating expenses over the period. 2. Price hikes were the main story for AMC this year, with management noting hefty raw material costs that hurt segmental margins (Group PBITDA margins down -0.4%). Pleasingly however, earnings headwinds are being anticipated to soften in regions as AMC successfully pass on these expenses and progress on their cost initiatives. 3. Full year dividend per share increased +4.7% to 45.0cps. 4. Balance sheet health remains resilient with Net Debt / PBITDA staying flat (2.7x) and the PBITDA interest cover ratio improving (7.0x).
• Raw material costs a drag on Group performance. The period saw continual hikes in raw material input prices which hurt overall Group performance. Specifically, management noted FY18 aluminium (up +19%) and liquids costs (up ~50%) being the key drags on the segments. Importantly however, looking forward management ensured investors on the conference call that they were making “good progress”, with earnings headwinds largely expected to moderate in FY19. Resins in many parts of the world (notably South America) have shown a slower rate of increase, aluminium continues to remain “stubborn”, while liquids (inks and varnishes) have similarly slowed in price rises. In the outlook, management are expecting the first half to still feel the heat from the pricing impact, before stabilizing in the second half – hence net off over FY19.
• Rigid Plastics sees restructuring. A restructuring program was announced for Rigid Plastics after the segment saw lower volumes and an adverse mix hurt performance compared to previous periods. The plan will seek to consolidate capacity into larger plants, invest more into productive assets, and reduce overhead costs. Specifically, we can expect to see investments into more effective injection machines to replace older capacity.
• More on the Bemis acquisition. No material new information on this front. In our view, the strategic rationale behind the transaction is hard to fault, with the possible asset profile bolstering AMC’s position as a global leader and cementing the Group’s presence in North America and Brazil.