Market should eventually be reassured on Amcor’s acquisition of Bemis

Thursday, October 11th, 2018

Amcor shares, which are modestly out of favour in the sharemarket, are an opportunity long-term income investors could consider. The stock is trading near year-lows because the market is digesting the US$6.8 billion of new shares Amcor will issue as payment for the acquisition of Bemis announced in August and due to complete in the March quarter of 2019. This is over half the current market capitalisation of US$11 billion, hence the pressure on the share price. While the acquisition is strategically sound, Amcor paid a full price for Bemis and did not use some of its normal acquisition price disciplines this time, another reason for the market’s caution.

While acknowledging Bemis is a very large bet for Amcor, we expect the forecast cost synergies of US$180 million per annum will be achieved promptly and prove conservative. We are also confident of revenue synergies as innovations and packaging options are cross-sold to the two businesses’ customer bases. Being the global leader positions Amcor to get out in front of new trends in recycling, longer shelf lives, resealability, retailer consolidation and ecommerce. The market should come to see the integration as parallel regional bolt-ons, its true nature, rather than one single risky combination, and value the benefits of regional expansion/diversification within the US via Bemis. A new cost savings exercise in rigids should deliver as the previous flexibles program did. By the end of 2020 working capital should fall as Bemis aligns with AMC’s superior ratios, and then the market should understand the cashflow benefits of Bemis. Debt and gearing should then fall.

These are catalysts for the stock to eventually rerate to our $15 valuation. Amcor is trading at a 10% earnings multiple discount to the market in 2020 compared with a long-term average 10% premium.

Meanwhile, one of the earnings headwinds of 2017-18 is abating. PepsiCo, a key buyer of Amcor’s rigid plastic beverage packaging, returned to organic growth in the June quarter after an earlier lack of marketing support for core brands caused North American beverage volumes to decline for four quarters.

Higher oil prices increase the cost of resin, an input to the manufacture of flexible packaging. This detracted US$43 million from the 2018 result. Amcor passes these on to its developed market customers with an average three-month lag but the delay is longer in emerging markets. The guidance for 2019 assumes no detraction from higher raw material costs but this may have to be revised if the recent strength in oil prices continues. The stock will probably consolidate around $13.50 until the oil price peaks and Amcor starts announcing financial results from the integration of Bemis.

The weak Australian dollar increases the translation of Amcor’s dividends, which are declared in US dollars.

Security Price: $13.49
Industry: Packaging
Forecast FY19 Dividend: 46 US cents per security
Dividend Yield @ USD/AUD of 0.7: 4.9%

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