In the final instalment of this Talking Top Twenty series, we take a look at Amcor (AMC.ASX) and Brambles (BXB.ASX).
Amcor Plc (AMC.ASX)
When we last wrote about Amcor our contention was that this business remained an attractive reflation trade, especially given exposures to the healthcare segment (i.e. the volume growth in elective surgeries back to pre-pandemic levels) and the growth of flexibles packaging. For those that were investors, this has proven correct assuming we use the price action YTD as representative of this particular thesis (the security seemingly one of the few that has been in the green).
The other part of our thesis was around the Bemis acquisition, which we felt was a great move given the significant economies of scale vis-à-vis procurement (especially in resin across North America). Broadly this has continued to be correct with target cost synergies likely to be exceed expectations; the original target being US $180m for 2022 and we expect this to come through substantially higher given guidance. Before proceeding further, we must state that we believe it is rarely the case that M&A activity actually fully realises the touted gains and it often becomes a case of outsized egos (GE being the perfect poster child perhaps).
To the numbers, EBIT increase of +8% in constant currency terms (we like the fact that this is one business that places a focus on this metric as opposed to EBITDA) to US $1.08bn. The return to growth of the Rigids segment (+4% in constant currency) was pleasing, this has always been our issue with the business given stagnation across the category(on a global scale. AMC’s more recent focus on thermoplastics and divestment of the legacy Australasian fibre, glass and aluminium beverage can packaging business bodes well for shareholders in terms of margins. That is, in an industry primarily driven by scale and cost out measures, a strategy that looks for value add is a clear differentiator. Speaking of cost outs, the pressing concern for investors has been the inflationary pressures as indicated by PMI’s in recent years. Even here though, the sheer scale generated has ensured that profitability continues unabated while the bargaining power of size has meant that any increases were effectively passed on. Margins have remained consistent while headline volumes have grown; to give some context, the business has recouped over 1.1bn in raw material inflation through passing it on to customers. On the forward guidance front, management has indicated US 79.5c - 81c EPS. Given current momentum we think that this will beat on the upside, potentially at 83c EPS.
Red Flags & Risks: AMC is an unusually complicated company for the everyday investor to properly assess. Operations now span 43 countries with a 20% exposure to emerging markets. This makes both currency risk and geopolitical uncertainty key to evaluating the overall risks to the business. This was evident recently in their operations in Argentina where inflationary pressure and political uncertainty has made it extremely difficult to de-risk this part of the business. We also have a contrarian view in terms of the future of the AUD (to the upside), which may create a significant headwind for the business.
Expectations: This is one defensive exposure for any portfolio and, with a disciplined strategy, it could offer some dividend growth too. Our big issue was the trading range, i.e. AU $14-16, which made it an ultimate traders nirvana. The security has finally broken above that (at the time of writing), a definitive breakout would be worth some peace of mind. As a rule of thumb we feel that excessive shorter-term traders in a security present a significant obstacle when looking to what is effectively a longer term staple.
Dividend Yield: Assuming a share price of AU 18.18, the current yield stands at about 3.94%. On a nominal basis, our expectations are that this will go up at a high single-digit rate over the coming decade.
Brambles Ltd (BXB.ASX)
This is one security that remains confusing. When we previously wrote, we expected it to be a great reflation trade. The security has remained range bound and has tracked sideways since. Granted, the market continues to perhaps discount headwinds for pallet pooling and changes to the nature as well as composition of the worldwide goods trade. The business remains attractive in our opinion and is showing some stellar results. BXB has an attractive growth profile, operating in 60 markets, and one whose revenue stream is considerably stickier than the traditional, non-rental whitewood pallet model. Maybe this is a result of the mundane nature of the business but given the sectors that BXB operates and has exposure to, as well as the normalisation of economies post-Covid (with the exception of China), it is arguably valid to expect a better return.
We feel the numbers will explain why the above is the case for us. Sales revenue continues to maintain momentum with +7% growth (at constant FX rates). While there have been significant headwinds in terms of cost and procurement inflation (as indicated by the prices of lumber), labour and transport, the business has been effective in passing the costs through to customers much like Amcor. This has been combined with significant cost out initiatives that are on track to deliver an increase in underlying profit of around +3.5% to US $950m (on a conservative basis). For the shorter term, the business remains on track to deliver its on-market AU $2.4bn buyback program. Looking to the specifics, CHEP America remains the standout with +11% sales revenue growth for the first 9 months ending 30 June 2022 and CHEP EMEA standing at a stellar +6%, CHEP Asia-Pacific has been lagging a little given headwinds in the PRC but this remains substantially mitigated by rollovers in RPC contracts from the previous financial year. All up, stellar performance by management who have continued to please in their discipline and cost out measures given broader inflationary pressures.
Key catalysts going forward will be the pallet trails with Costco (pending a decision at the end of FY22), continued sales revenue growth (with guidance revised up to +8%) and the automation program over the long run. More importantly for the dividend starved investor, management has indicated the payout ratio of 45-60% remains intact with our opinion being that it hits the upper end, around 55%.
Red Flags & Risks: The big risk remains external shocks. At the time of our previous writing, this was primarily about the Eurozone business but Asia-Pacific can definitively be added to the list. This will be exacerbated further by autosales and any policy errors on the part of central banks that may dent overall consumer demand and consumption.
Expectations: We remain optimistic about the business for no other reason than balance sheet and management discipline. Pallet pooling may not be the sexiest of propositions but, if done well and given the business’ scale, a rather lucrative one.
Dividend Yield: A dividend yield of 2.9%, assuming a share price of AU $10.44.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.