ANALYST’S NOTE

Pact Group (PGH) delivered FY18 Group earnings (EBITDA) of $237.3m which came in below analyst estimates of $250m, adversely affected by $13m in higher raw material and Australian energy costs in 2H18.

The results saw its share price drop by -18% (biggest drop since IPO). PGH board declared 11.5 cps dividend (65% franked). The international segment results were the biggest drag on PGH’s performance, where EBIT decreased -12.6% and margins fell by 400bps to 15.5%, impacted by weaker industrial demand in China.

On a positive note, PGH’s Australia assets performed well delivering +14.5% increase in revenue and +3.9% uplift in earnings (EBIT). PGH announced the acquisition of TIC Retail Accessories for a purchase consideration of $122m, funded by $62m in cash and $60m in shares, to be completed on 1 October 2018.

Management gave positive FY19 outlook and expects “higher revenue and earnings (before significant items) in FY19, subject to global economic conditions”. Management also gave a guidance on EBITDA, to be in range of $270m and $285m for FY19, which implies a significant uplift in earnings from FY18. Whilst the results were disappointing, the strong guidance given by management for FY19 and undemanding valuation of 11.4 PE20x, 6.0% dividend yield keeps us interested – Buy.

• Strong FY19 Guidance. PGH expects EBITDA (before significant items) between $270m and $285m, which implies an uplift of +13.9% to 20.2% over the pcp.
• Key highlights to PGH results. 1. Strong revenue growth up +13% to $1.7bn over the pcp especially in Australia in contract manufacturing, infrastructure and sustainability sectors, partially offset by lower demand in dairy, food and beverage sector due to a major customer plant closure in dairy sector and drought conditions in the agricultural sector. 2. Earnings (EBITDA) increased +2.0% to $237m adversely impacted by $13m of higher input costs and Australian energy costs. 3. NPAT before significant items of $20.2m, was down -5% to $95m. 4. The Board declared final ordinary dividend of 11.5cps, franked to 65%, bringing total dividend payout to 23cps for the period. 5. PGH continued strong cash generation with cash conversion of 94% and maintained strong balance sheet with gearing ratio decreasing from 2.8x to 2.5x. 6. PGH completed its Asia acquisition and acquisition of ECP and management confirmed that both these acquisitions performed well in line with expectations.
• Pact Australia (76% of revenue and 63% EBIT) – performed strongly. The segment saw solid +14.5% uplift in revenue to $1.3bn, driven by crate pooling revenues and organic growth in contract manufacturing, sustainability and Infrastructure sectors. There was a +3.9% increase in earnings (EBIT), however EBIT margin deterioration by 80bps to 8.1% from 8.9% pcp, impacted by higher costs to serve in the rigid packaging businesses and unrecovered energy and raw material costs.
• Pact International (24% of revenue and 37% EBIT) – FY18 results disappointing. The segment saw a +10.3% increase in revenue but earnings (EBIT) decreased by -12.6% to $61.1m due to short term time lag in recovering raw material input costs, unfavorable timing of government project in New Zealand and weak industrial demand in China. Margin also deteriorated by 400bps from 19.5% to 15.5% due to significant mix impact of the Asia acquisition to the segment in addition to adverse impacts from raw materials and FX.
• Acquisition of TIC Retail Accessories to be EPS accretive in year 1. PGH announced it entered into an agreement to acquire TIC Retail Accessories Pty Ltd (TIC) for a purchase consideration of $122m (representing EBITDA multiple of 6.5x), to be funded by $62m cash and issue of $60m shares to the vendors. TIC has FY18 revenues of $95m. PGH would pay earn out payments of up to $30m in FY19 and FY20 (subject to delivery of specific financial hurdles). The acquisition will expand PGH’s geographic reach in the materials handling sector and will further leverage the group’s capability in innovative pooling technologies.