Amcor: Interim result 2018

Packaging giant Amcor has announced a decent result for the six months to December, though sales growth was a sore spot. Revenue rose just 1% to US$4.5bn but, after adjusting for currency movements, underlying sales fell 2%. Cost cutting and increased average selling prices thankfully offset much of the decline, so net profit rose 4% to US$330m in constant currency terms.

The biggest drag was the Rigid Plastics packaging division, where constant currency sales fell 3% due to lower volumes in North America. After stripping out recently acquired businesses, organic sales fell a dismal 7%. The company offset some of this with cost-cutting initiatives so earnings before interest and tax (EBIT) for the division remained flat.

The division should do better next year. Management said the 2017 acquisition of Sonoco for US$280m is complete and the business adds new extrusion blow molding and injection technologies to the Rigid Plastics segment (see Amcor: buying big and getting better at it). Management expects it to add US$50m to EBIT by 2019.

The larger Flexibles packaging division – which accounts for 70% of sales – also had a tough year with constant currency sales falling 1% to $3.2bn. However, the EBIT margin expanded 0.4 percentage points to 12.5% due to higher average selling prices offsetting a rise in raw material costs. The cost of raw materials has continued to rise over the year and management said further price rises for Amcor products will be necessary.

The company is being squeezed but it has more wiggle room in margins compared to most competitors due to its economies of scale, and the division still enjoys an excellent return on capital of 24%.

Net debt unfortunately rose US$247m to US$4.4bn and management said US$777m would need to be refinanced in October. Operating profits still cover interest expenses a good 7.5 times over – and a bit under half of the company's borrowings are at a fixed rate, providing a level of certainty – so we're not too concerned in the short term. If US interest rates rise, however, profit growth is likely to be anchored.

Management expects moderate profit growth from the Flexibles segment for the remainder of the year and Rigid Plastics to be largely flat. Consensus estimates are for 64 US cents per share in 2018, putting the stock on a forward price-earnings ratio of around 18. HOLD.