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Morningstar | 1H Rebound in Rigid Volumes Helps Offset Flexibles Weakness for Amcor; FVE Unchanged

Weak flexibles volumes in developed markets led to a softer first-half result for narrow-moat Amcor than we’d anticipated. Amcor’s constant currency sales were accordingly soft at 4.3% in the first half. Resurgent volumes in the rigid segment were pleasing, however, and provided some offset. We’ve moderated our full-year flexibles volume expectations and now expect full-year fiscal 2019 top-line growth of 5.8% to USD 9,861 million, down from prior expected growth of 6.2%. Nonetheless, with our full-year operating income forecast largely unimpacted at USD 1,125 million and our medium-term expectations unchanged, we retain our fair value estimate of AUD 14.60 per share. Amcor shares continue to screen as fairly valued.

While flexibles volumes grew strongly in Asia, flat volumes in Europe and the Americas offset the Asian result and saw flexibles sales grow at 2.9% on a constant currency basis. We’ve trimmed our full-year fiscal 2019 flexibles segment volume forecast to 1.3% from a prior 2.4% and now expect segment top-line growth of 5.4% to USD 6,883 million, down from our prior growth forecast of 6.4%. However, segment first-half segment margins of 12.4% are tracking largely in line with our unchanged full-year forecast.

In contrast, we’ve upgraded our full-year rigid segment volumes forecast to 2.6% from 1.5% to reflect resurgent rigid beverage volumes in the first half. Favourable sales mix and volumes contributed to strong first half top-line growth of 7.6% on a constant currency basis. Pleasingly, beverage volumes rebounded strongly from a poor showing in the prior corresponding period where a wet summer saw North American volumes fall 7.4%. Full-year fiscal 2019 rigid sales are now expected to grow by 6.8% to USD 2,978 million, versus prior forecast growth of 5.7%. A first-half segment EBIT margin of 10.6% trails our full-year forecast, but we continue to expect segment EBIT margin of 11.4% in fiscal 2019.

Amcor informed the market in late January of the delay to the anticipated closing date of the Bemis transaction. Minimal further detail was provided with the earnings release and Amcor continues to expect completion in the second quarter of calendar year 2019. The transaction remains subject to antitrust approvals in Europe, the U.S. and Brazil, while all other necessary clearances have completed. While the U.S. Government shutdown has delayed U.S. antitrust approval and the review of deal documents by the U.S. Securities and Exchange Commission, Amcor expects a decision from the European Commission in the coming days. We continue to expect all necessary clearances to be granted, given the minimal geographical overlap of the two combining businesses. With remaining clearances highly probable and with shareholders on both sides of the deal set to benefit from synergy realisation, we continue to ascribe a 100% probability of deal completion and expect USD 126 million in synergy realisation. Therefore, the deal remains set to add AUD 1.14 per share in value for Amcor shareholders, in our view.

The balance sheet continues to look extended at net debt/EBITDA of 2.8 times at fiscal 2019 half-year end and we expect net debt/EBITDA of 2.9 times post Bemis deal completion. While leverage will reduce relatively quickly toward Amcor’s through the cycle target of 2.25 to 2.75 times, current leverage is manageable with interest covered around 6 times in fiscal 2019.