Pact's struggles weigh down Orora

The underwhelming sharemarket debut of packaging company Pact Group Holdings has weighed on the demerger of Amcor and its $2 billion Australasian packaging and distribution business Orora.

Orora shares opened at $1.16 and closed at $1.22, with more than 69 million of the 1.206 billion shares on issue changing hands, while Amcor shares fell by $1.11 to $10.25.

Amcor shareholders, who received one Orora share for every Amcor share, made a net gain of 11¢ a share as the sum of the parts exceeded the whole.

"I think Amcor shareholders are going to be pretty happy anyway if you look at the share price over the last 12 months," one analyst said.

But the returns could have been higher if not for Pact Group's unimpressive sharemarket debut. Pact shares closed at a 12.6 per cent discount to their $3.80 issue price on Tuesday and shed another 12¢ to $3.20 on Wednesday.

While Pact Group makes plastic food and beverage packaging and Orora focuses on fibre, glass and metal packaging and packaging distribution, analysts believe the two companies are sufficiently alike to trade on similar earnings multiples.

Commonwealth Bank analyst Michael Ward said Pact's close on Tuesday represented a multiple of 11.7 times forecast 2014 earnings per share and a multiple of 7.8 times earnings before interest, tax, depreciation and amortisation.

Applying a similar multiple to Orora implied a valuation of 97¢.

Before the demerger, analysts had valued Orora shares between $1.40 and $1.75, albeit on a 12-month basis.

Analysts expect heavy selling in Orora shares over the next few weeks because most of Amcor's international shareholders are not considered "natural" or long-term holders of the stock.

Orora and Pact operate in mature, or low-growth, packaging markets that generally grow in line with GDP. Pact has managed to grow sales more than fivefold over the past 10 years through multiple acquisitions.

Under a "five-cubed" strategy, Pact wants to become a $5 billion company operating in five regions within the next five years and is eyeing another half-dozen acquisitions.

But analysts believe Orora offers greater earnings growth potential in the short term, as the company benefits from recent "self-help" strategies including cost-cutting and capital investments.

Broker CIMB has forecast net profit of $103.4 million this year and $134.1 million in 2015, compared with $73.4 million in 2013.

The demerger leaves Amcor free to focus on its higher-growth and higher-margin flexible, rigid plastic and tobacco packaging operations in Europe, the Americas and emerging markets in India and Asia.