Amcor's Aussie amputation

Amcor's earnings topped expectations but the focus was all on how much better the company would perform without the Australasian arm.

Lopping off laggards has become strategy du jour in the corporate world and Amcor’s (AMC) earnings result this morning highlighted just how much better the company will perform once it spins off its Australasian packaging and distribution arm.

The result opened a window on the amount of blue sky available to an Amcor flying solo, even with the better-than-expected performance of the slimmed down AAPD.

No matter which way you cut it, AAPD is a drag on earnings. Returns at 8.9% were slightly below last year and well below the other divisions.

The aggregate numbers themselves were impressive. Net earnings jumped 45% to $600.6 million while on an underlying basis, earnings of $689 million was $5 million above expectations with flexible packaging driving the result.

Amcor chief Ken MacKenzie did his best this morning to promote the spin-off, announced earlier this month, as beneficial for both arms rather than merely ejecting a non-performer. And he has allocated a substantial amount of capital investment in the Australasian operation, to the tune of about $1 billion during the past four years, to ensure it has a strong future.

Clearly though the growth arm is the bit MacKenzie wants to keep within Amcor, which has seen the company become the global leader in rigid plastic containers, food flexibles, healthcare flexibles and tobacco packaging.

The Australasian spin-off will hold somewhere between $700 million and $750 million in debt, which most analysts reckon is a reasonable starting point for the lower growth domestic operation.

Amcor has been a beneficiary of the investor appetite for defensives in the past 18 months and while it was marked down this morning, it is likely to remain well supported in the lead up to its split some time later this year (see Cliona O'Dowd's Collected Wisdom). The scheme booklets will be distributed to shareholders around November.