Share-buy back saves the day at Amcor

Why all the write-offs?

The group's net profit after tax but before abnormals was right on target at $252m, just a million below our forecast. As expected, abnormal charges after tax totaled $202m of which $160m was attributed to plant closures and rationalisation costs. Write-offs recorded over the last two years now total $524m, a figure that has raised a few eyebrows.

Obviously Mr Russell Jones, the recently appointed MD, is adamant on clearing the decks. It's also worth noting that the lower the value of assets on the balance sheet, the lower the depreciation and amortisation expenses when earnings are on the way up! This explains the common practice of letting asset write-downs get lost amongst the doom and gloom of recent times. A partially franked 20 cent final dividend (franked to 35%) made for a steady full year dividend of 38 cents per share.

The packaging operations remain core to the group, generating 81% of total revenue and 75% of the group's earnings before interest and tax. After the closure or sale of 7 plants during the last 12 months, there are still 52 in operation. Another 21 sites will be sold, closed or merged during the next twelve months. (Does our downsizing article spring to mind at this point?) The paper division did well to report only a modest decline in sales and profitability, particularly when considering uncertainties surrounding global paper markets. Amcor's 50% investment in Kimberly Clark contributed $61.5m to the group's bottom line.

Sentiment to stay negative

Since the start of this financial year all businesses and geographic segments have performed to budget. While this is encouraging, it's unlikely to be enough to swing sentiment into positive territory, at least until stability returns to the pulp and paper market.

In the meantime, Amcor's aggressive cost cutting and rationalisation program will roll on in an effort to better position the company for future growth. Even Standard & Poor's has taken a negative stance towards the stock due to their concern that difficult trading conditions will constrain any improvement in Amcor's earnings. For the time being we'll opt for a more cautious Hold recommendation, although the stock can be ACCUMULATED on weakness below $6.00.