Amcor (AMC) – Sticking it out

Amcor manufacturers and sells rigid and flexible packaging products in Europe, North America, Latin America, and the Asia Pacific, and sells through its direct sales force. The company was incorporated in 1926 and is headquartered in Zurich, Switzerland.

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Ord Minnett reviewed its Amcor (AMC) model following a more than 70% surge in the price of petroleum-derived resin, which makes up around half of cost of goods-sold (COGS) for the packaging group, since the Middle East war started around six weeks ago. Resin have long been correlated to the price of crude oil and recent resin price spikes have been spread across all the different types of the bonding agent, while there are now shortages of resin being reported across several regions. We note Amcor suffered an even greater resin price spike of 100% in 2021 and the company navigated safely through that period with earnings holding up relatively well and we expect the company will handle the current situation efficiently.

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Actions that Amcor could take include following options:

·         Agreeing new contracts based on current prices;

·         Squeezing its suppliers for discounted prices or better terms;

·         Short-term surcharges; and

·         Price increases, noting most of Amcor’s customers have contracts linked to rises and falls in raw materials costs. In addition, for some products – typically fast-moving consumer goods (FMCG) and high-volume grocery items – packaging costs represent just 1% of the product’s price which gives the customer the ability to absorb cost increase with a meaningful effect on their own COGS.

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In our view, however, the greater impact on Amcor could come from demand destruction as inflation picks up pace following the energy price spike. This would drive reduced volumes, especially convenience store sales of snacks or drinks, and make passing through any cost increases to customers more difficult for Amcor. Accordingly, we now model a 1% fall in volumes for the second half of FY26 and the first half of FY27, although the impact of this change is ameliorated by further cost savings, reduced depreciation and amortisation charges and a lower tax rate.

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This leads to minimal changes at the EPS level, although we reduce our target price on Amcor to $66.00 from $70.00 given a sector derating in our blended discounted cash flow (DCF) and peer-relative valuation. We raise our recommendation to Buy from Accumulate on valuation grounds, however, viewing current share price levels as fully discounting the earnings and cash flow risks facing the company.