Amcor: Interim result 2019

There are several things to like about Amcor, but foremost among them is that it's big - so big, in fact, that multinational food and healthcare companies have a hard time avoiding it. That gives it negotiating power and economies of scale. Throw in an impressive track record of cutting costs and it's little wonder it has far better margins than its competitors.

Amcor is the leading manufacturer of flexible packaging worldwide and supplies cartons, plastic containers and films to a range of industries, with an overall market share of about 25-30%. In the first half of the financial year, Amcor's sprawling dominance helped it win a multi-year contract to supply coffee pods to Nespresso, extending its existing partnership. Management said coffee drinkers are increasingly seeking convenient, recyclable, single-serve packaging, which has helped fuel demand for Amcor's expertise.  

Revenue for the flexible packaging division grew 3% and operating profit was up 2% after adjusting for currency fluctuations. That's not what you would call a breathtaking performance; but, given Amcor's size, it's only ever likely to match economic growth. Management said it expects 'solid growth' for the remainder of the year, with a US$20m earnings boost from acquisitions and cost-cutting expected for the full-year result.      

The company's Rigid Plastics packaging division performed better, with revenue growing 8% and operating profit up 6% in constant currency terms. The geographic split, though, was heavily skewed towards emerging markets, where earnings grew 9%. Developed markets had flat sales.

Emerging markets account for around 30% of revenue and their volatile currencies and economies tend to make profits lumpy. This year was favourable to Amcor, but it's important to temper expectations for the year ahead with several large developing economies experiencing a slowdown in economic growth over the past few months, such as China and Brazil. 

Overall, total revenue rose 4% to US$4.6bn and net profit rose 3% to US$328m in constant currency terms.

Bemis hits roadblock

A few months ago, Amcor announced the purchase of US-based competitor Bemis (see Amcor's big bite). The merger has received regulatory clearance in most jurisdictions - except, you could argue, the only one that matters. The USA. A partial government shutdown that lasted into January caused a delay in the Securities and Exchange Commission's antitrust review. 

Nonetheless, management said it expects the deal to complete by July and the combined company will have US$13bn in sales and more than US$1bn in free cash flow.

Around US$180m of duplicate costs should also be cut from the combined business in the first few years. If the company manages that, it would be the equivalent of 5% of Bemis's sales - an incredible feat given that Amcor's and Bemis's profit margins are in the mid-single digits. We're usually sceptical of significant 'acquisition synergies'. However, with the significant economies of scale in packaging, there's a good chance the company will meet these lofty projections. 

Balance sheet

We like Amcor and the Bemis deal only strengthens it, but the company's balance sheet has always been on the nose. Operating cash flow rose 27% during the half so we were glad to see management reduce net debt from US$4.3bn to US$4.0bn. The interest bill topped US$90m, though, consuming more than a fifth of operating profits. Around half of the company's borrowings are at a fixed interest rate, but rising interest rates could still crimp profit growth over the long term.

Management expects 'solid growth' in operating profits for 2019 with US$700m-800m in free cash flow. The stock trades on a free cash flow yield of 5.2% and a price-earnings ratio of 16 based on consensus estimates for 2019 earnings. That's a fair price but we're mindful that Amcor is only likely to achieve organic growth of 3-4% over the long term.

This result wasn't anything spectacular but the company is improving on many fronts and we still came away optimistic about its future. We're notching up the price guide and continue to recommend you HOLD.