Ord Minnett has initiated coverage of Pact Group with an Accumulate recommendation and a target price of $7.05, with the packaging company set to return to positive organic growth as macro-economic headwinds in the agriculture, dairy and mining segments ease. In addition, management has made significant efforts to mitigate the risk of contract losses.
Pact provides of consumer and industrial packaging solutions in Australasia and Asia. It operates across seven countries and has more than 4,000 employees. Pact specialises in the manufacture and supply of: rigid plastic and metal packaging; materials handling solutions; contract manufacturing (co-manufacturing) services; and recycling and sustainability services.
The company has traversed a difficult period for organic growth, with contract losses and macro headwinds impacting volumes in FY15–16. On the former, management has established sales and operating groups to more effectively monitor and incentivise managers, and therefore reduce the risk of further contract losses. On the macro front, the headwinds of recent years should reverse.
Pact’s 2015 efficiency program started to deliver benefits in FY16 of around $6.6 million. By the end of FY17, management expects to achieve its total sustainable benefit target of $15 million, which should help to drive margin expansion in FY17–18.
Growth from acquisition forms a key part of Pact’s strategy. From a leverage standpoint, Pact has more than $100 million of debt headroom before it reaches its internal net debt to operating earnings target of under 3.0 times. Interest cover by earnings before interest and tax interest is near Pact’s target of more than 5.0 times, but we do not expect this to preclude further acquisitions, particularly if deals are earnings and cash-generative.
The return of organic growth, coupled with the full benefits of the 2015 efficiency program and earnings from acquisitions, should help Pact deliver the highest level of earnings growth across our packaging coverage universe of around 13% underlying EPS compound annual growth rate between FY16–19.