Smaller packager delivers good news

What's new Amcor announced its intention to spin off its Australasia and Packaging Distribution (AAPD) businesses on August 1, continuing the market's wave of demergers.

AAPD will have a revenue base of $2.8 billion and operating earnings of about $280 million. It has certainly been whipped into shape during the past few years, with about $1 billion of investment, while 65 plants have been scaled down to 26.

Outlook AAPD is past the peak of its capital expenditure cycle and should be able to generate solid free cash; plus, financial benefits of the recent restructures are projected in the next couple of years. Indeed, the longer-term prospects for AAPD are not as bright as the new-look Amcor's flexible and rigid plastics packaging assets, which have a combined $10 billion revenue base and $1.5 billion operating earnings base, boasting global market leadership. This is the main reason we are attracted to its shares.

Price Amcor's stock price is up 20 per cent over the past six months and over 40 per cent in the past year.

Worth Buying? We fully support Amcor's decision to demerge AAPD into a separately listed company, though we reserve our final judgment on the smaller entity pending the release of more financial information and its capital structure.

However, the stock is trading at lofty multiples (almost 20 times consensus fiscal 2013 earnings estimates, 16 times the following year). Consequently, we believe it is prudent for those without exposure to wait for a pull-back in price before buying into Amcor.

Brian Han is senior research analyst at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, phone 1300 881 177 or email info@fatprophets.com.au.