Outside the Box

Amcor’s share price has come under pressure in recent months following press speculation that it is looking to acquire US-based Bemis Company, as well as soft outlook commentary provided at the AGM.

 

In our view, a deal with Bemis is unlikely at current share price levels, and the trading headwinds flagged by Amcor’s management team are temporary. With both factors having a negligible impact on valuation, we believe an investment opportunity has emerged.

 

A core source of value creation for Amcor has been its ability to make and integrate acquisitions over the years. However, we do not believe its share price fully accounts for the value it can generate from deploying free cash flow into value-accretive deals.

 

Gauging the earnings contribution from M&A activity versus organic growth has been a question raised frequently by investors. While Amcor’s organic performance has not been stellar, our analysis provides us with some assurance that the company can create value via both organic growth and acquisitions.

 

At the AGM, management flagged earnings headwinds in the first half of FY18 due to higher input costs, soft market conditions for North American beverages and weak demand in emerging markets. We have factored in these dynamics, although we believe the impact should dissipate in the second half as storm-related resin premiums unwind and consumer demand recovers in emerging markets. Recent data releases and industry commentary support this view.

 

Amcor stands out from other industrials in our coverage, with the stock trading on a 12-month forward P/E multiple of about 18x and at an FY17–20F EPS compound annual growth rate of 9.3%. We also note upside to earnings expectations could stem from free cash flow being deployed into value-accretive acquisitions, a strategy management has executed successfully through the years. We have raised our target price for Amcor to $16.85 from $16.10 and upgraded our recommendation to Accumulate from Hold.

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