The adage “sell in May and go away” is in full swing with the ASX All Ordinaries down over 7% month to date. Safe havens appear few and far between, but this is when dependable and well-diversified defensive stocks show their worth.
AMC is a global leader in the development and production of responsible packaging products across EMEA, North America, Latin America, and Asia-Pacific and has been held within our model portfolio for some time. AMC has a strong balance sheet positioning the company well to navigate difficult markets.
As a producer of packaging, the company’s operations are linked to everyday needs across two key segments, flexibles, and rigid plastics. The flexibles segment is the larger segment of the two (see figures 1 and 2 below). Its operations involve the manufacturing of flexible and film packaging in the food, beverage, medical and pharmaceutical, fresh produce, snack food, personal care, and other industries. The rigid plastics segment consists of operations that manufacture containers for a range of predominantly beverage and food products, including carbonated soft drinks, water, juices, sports drinks, milk-based beverages, spirits and beer, sauces, dressings, spreads, personal care items, and plastic caps for a variety of applications.
Figure 1: Sales mix by Segment Figure 2: Earnings before income tax (EBIT) mix
Source: Company Data, Form 8-K - Q3 22 Results. Data as of 31 March
AMC released its 3Q22 result on 4 May. Overall, the result was marginally ahead of consensus expectations, highlighting the company’s resilience. Key fast moving consumer goods customers Coke and Pepsi reported strong results during the month ahead of the result release which gave us confidence.
The group's constant EBIT rose 6%, while earnings per share (EPS) increased by 11%. AMC has adjusted its FY22 earnings guidance towards the top end of the range, with constant currency underlying EPS growth now expected to be between 9.5-11% (7-11% previously). Welcome news for investors considering the operating conditions has been volatile. Management has done a good job at managing cost inflation and navigating supply chain disruptions during a challenging environment.
AMC recorded sales of USD8.2 billion year to date, which crucially included USD810 million (11% growth) of price increases, attributable to the pass-through mechanism relating to higher raw material costs. Q3 earnings per share (EPS) of USD0.204 was 4% above consensus. AMC repurchased 2.3% of outstanding shares in 9 months for USD423 million and expects to complete a USD600 million buyback in FY22.
Little was made of the Russian exposure which represents 2-3% of AMC sales, but the group has been downsizing its operations since the outbreak of the invasion of Ukraine. Elsewhere, flexible plastics sales were down in China given the extent of continued lockdowns.
With nearly 90% of AMC’s packaging ending up around consumer staples, we believe this will continue to provide relative defensiveness in the event of higher inflation and slowing economic growth.
Focus on higher margin segments and innovation
CEO Ron Delia remarked that the company is focusing on five priority segments (see image below) which they believe will drive stronger growth, margin expansion, and long-term value creation for shareholders.
Figure 3: Growth in priority segments driving mix and market benefits
Source: AMC 3Q22 Presentation, 04/05/2022
AMC has a strong track record of innovation in the polyethylene terephthalate (PET) space. The focus has allowed the business to gain market share and grow value per unit, which ultimately contributes to EBIT growth. Innovations in the past in PET reduced bottle weight by 15%. The latest innovation is the “PowerPost” bottle base which reduces the plastic resins and energy required to make hot-fill containers by up to 30%. These improvements are important since they are directed to the hot-fill container segment in North America which accounts for roughly 10% of AMC group sales and is one of the aforementioned five growth segments.
Amcor enjoys market leadership in most markets it operates in and has the scale to pursue innovative margin expanding endeavours. Such initiatives help AMC customers achieve outcomes that to a greater degree are shifting more and more towards sustainable, recyclable packaging.
AMC is currently giving investors a decent circa 4% dividend yield and its PE multiple of 15x is in line with the average PE of the ASX200. We believe this is reasonable for what is a business with highly defensive future cash flows, and we are confident in maintaining AMC as a core holding within our model portfolio.
Other portfolio activity
Initiate a 2% position in CSL Limited (ASX: CSL)
We look to identify companies that have a strong competitive advantage, enabling the investment of capital to drive sustainable returns or what is often referred to as "quality" investing, CSL is the benchmark for these attributes.
The COVID period has provided challenges for CSL as declining collections of its raw material, plasma has resulted in lower volumes as well as higher costs. We see an improving outlook for the company with opening economies driving increased plasma collections and higher earnings growth.
Moreover, the stock has de-rated from over 40 times price to earnings to a more reasonable 30 times with potential catalysts evident from its research and development pipeline in the near term.
All statistics and information referenced are sourced from the named Company's ASX announcements, share prices, website, or discussions with Clime, unless otherwise stated.
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