Following on from my equity strategy theme that dollar-exposed industrials are the best pick for Australian share investors in the medium term, find below a Deutsche profile of Amcor:
We believe the risks to earnings are still to the upside given the depreciation of the AUD, ongoing operational improvement, cost reductions, customer innovation, and the benefits of recent acquisitions. We expect free cashflow to improve meaningfully in the second half and the company could announce a capital management initiative with the sale of land at Fairfield ($150m). We maintain our Buy rating with the stock trading at a 7% discount to our revised valuation of $10.30/share and at 15.6x FY14E earnings.
FX becomes a tailwind
The depreciation of the AUD not only enhances the translation of Amcor’s offshore earnings but it also improves the competitiveness of the Australian businesses. We estimate every €1c move impacts net profit by A$5m and every US1c move impacts net profit by A$3m. Using spot would result in an FY14 earnings increase of ~10%. We would also expect to see less customer offshoring, increased customer exports, and less direct importing.
Sale of land at Fairfield; potential for capital management
We expect Amcor could announce a special dividend (A12.5cps) or $150m share buyback with the completion of the sale of land at Fairfield. According to press reports (AFR, 13 June), Amcor is close to completing a sale to Alpha Partners for $130m (DBe $100m), although the net proceeds are likely to be reduced by transaction and remediation costs.
Share price target increased 11% to A$10.30/share; risks
Our share price target of A$10.30 is based on our DCF valuation (WACC 9.0%, equity/debt ratio 70/30, pre-tax cost of debt 7.0%, terminal growth rate of 3% in line with GDP). Key risks: integration, restructuring, packaged food and beverage demand, currency movements and rising raw material costs.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
