EUR 850.00 For Business Accounts Only

Morningstar | Surprise CEO Resignation at Narrow-Moat Pact; FVE Unchanged

Narrow-moat Pact Group’s CEO Malcolm Bundey surprised the market by resigning after less than three years in the top job. Chairman and Pact founder Raphael Geminder has been appointed executive chairman until such time a new CEO is appointed. We maintain our AUD 4.90 per share fair value estimate and still expect 3.5% EPS growth to AUD 0.27 in fiscal 2019.

While our valuation is intact, we view Bundey’s departure as mildly negative, given the completion of the CSI/Graham Packaging acquisition in Asia in fiscal 2018. Bundey had responsibility for these businesses previous to his tenure at Pact, serving as President and CEO of CSI and Graham Packaging prior to their divestment by Reynold Group Holdings. We have previously noted our concern regarding competitive pressures in Asian markets for rigids and beverage closures. Our apprehensions were somewhat moderated, however, by Bundey’s knowledge of the assets being acquired. With Bundey now no longer at the helm, we see potential for the integration of the businesses into the broader group to become more challenging, thus risking stated deal synergies, estimated by management at AUD 2.3 million. However, stated synergies account for a mere AUD 0.06 per share of Pact’s value, by our estimate. While the realisation of deal synergies is key to assuring that capital allocation under the deal was sound, they are immaterial to our fair value estimate.

However, we view the potential for lost market share in Asia as a larger risk, a possibility should the incoming CEO lack understanding of the CSI/Graham Packaging’s Chinese and South East Asian exposures. We therefore advocate for a successor with requisite experience in Asian plastics markets, which we see as key to ensuring success in the region, particularly in light of the potential for the acquisition to be utilised as a platform for further merger and acquisition activity in Asia.