Sid Ruttala continues his journey through the ASX 20. This week his notes visit and review Brambles (BXB.ASX) and Amcor (AMC.ASX). A must read for the Australian investor.
The earlier parts of Talking Top Twenty, can be found here:
Part 1: The Banks - CBA & WBC
Part 2: The Banks - NAB & ANZ
Part 3: BHP & Fortescue
Part 4: CSL & Wesfarmers
Part 5: Woolies & Macquarie
Part 6: Telstra & Rio
Part 7: Transurban & Goodman
Part 8: Newcrest & Woodside
Brambles Ltd (BXB.ASX)
Brambles continued to surprise on the upside with stellar numbers. Sales revenue for 1H21 was up 6% with underlying profit growth also up 5%. Even more pleasing was the fact that much of the growth came from cost minimisation, efficiencies and price realisation (as opposed to volume growth). The automotive segment continued to lag given Covid headwinds but this was more than compensated for within the broader retail segment as retailers increased inventory levels to keep up with elevated consumption (i.e. stay-at-home). The pandemic also handed the company a catalyst (temporary or otherwise) for CHEP, their global pooling franchise - a segment facilitating the reuse of a pool of pallets and containers.
CHEP America’s continued to deliver an increase of 8%, driven primarily by increased demand by existing customers and increased price realisation (both positives in my view, indicating strong revenue stickiness). This has largely offset the decline in the container business in both Latin and North America, standing at negative -6%. Although the increases in the pallet business is likely to be somewhat transitory, the declines in the Integrated Containers Business (IBC’s) is likely to be lifted as economies come out of lockdowns and industrial production comes back to pre-pandemic levels. This all goes to showcase the advantages of a diversified revenue stream.
Again, kudos to management for increasing efficiencies across the business and maintaining the payout ratio at 53-55% (including share buy-backs) for the foreseeable future. A blessing for the dividend starved investor. Assuming the share buybacks and payout stays consistent, the forecast Net Debt/EBITDA stands at an enviable 2.1-2.3x based on company guidance going into the new financial year. A well capitalised business. The numbers also tell the story of strong relationships with existing customers and a disciplined strategy that saw it divest of the IFCO plastics business and the CHEP recycled business. This is a management proposition.
Red Flags & Risks
The big risk remains external shocks, especially with regards to the Eurozone business. The automotive numbers should, in all likelihood, come back to pre-pandemic levels and should see it compensate for some of the transitory tailwinds as a result of Covid (i.e. within the retail and consumer staples business). Nevertheless, it may pay for investors to keep a key eye on new automotive registrations and car sales within the larger Eurozone market.
Another risk pertains to Brexit and, although an FTA (Free Trade Agreement) is in place, management has indicated that there is uncertainty around transport costs and border checks. To date, this has acted as a tailwind for top-line growth given the requirements for UK retailers to increase inventory. That being said, the business will require some additional investments, in the heat treating of pallets for example.
Personally, I continue to remain optimistic about the company. It may not be the sexiest of propositions but management has continued to deliver for shareholders and it remains a good risk-return proposition.
A dividend yield of 2.5%, assuming a share price of $11.31 AUD.
Amcor Plc (AMC.ASX)
This could be another reflation trade as the numbers for Amcor are likely to grow, especially within the healthcare segment, as elective surgery volumes increase back to pre-pandemic levels. With flexibles packaging remaining its biggest segment, this is where the next key catalyst is likely to come from. Nevertheless, looking at the numbers so far, sales growth came in at 0.2% with flexibles likely to come in at 0.9%. This remains a play on the bottom line rather than top line growth.
The Bemis acquisition continues to please. This is somewhat surprising in my opinion given my cynicism about serial acquirers (Amcor has made 25 acquisitions since 2010). In this instance however, the synergies seem to be showing up in the numbers. Management has indicated that it remains on track to deliver $70m USD in synergies for fiscal year ‘21 and on track to hit $180m USD by fiscal year ‘22. Scale continues to deliver for Amcor.
Drilling down further, the cost of sales (COS) and operating expenses continued to flatline, COS coming in at 79% while operating expenses came in at 10.1% (excluding R&D). This indicates that Amcor continues to face unfavourable raw material costs. The company is still trying to refocus its product mix and rigids remain a problem despite representing a declining proportion of overall revenue.
Given the level of acquisitions it is perhaps unsurprising that the company’s net debt/EBIDTA is standing at 2.9x following the Bemis acquisition. The company has received some catalysts given the low interest rate environment but we would like to see greater attention paid to 1) refinancing existing facilities; and 2) extending the duration so as to lock in the rates, especially in the likelihood of increased inflationary pressures.
Red Flags & Risks
AMC is an unusually complicated company for the everyday investor to assess properly. 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.
A complex business that will continue to behave as a defensive rather than a growth play. I still do not see any catalysts that may rerate the underlying security but, as I’ve mentioned previously, the price-action is a traders nirvana as it sticks to the $14-16 AUD mark. A strong AUD can be disproportionate in its impact upon the business but could again see opportunities arise for individual traders. You would want to know what you're doing if you were going down this route though.
Assuming a share price of $15.50 AUD, then the current yield stands at about 4.5%. On a nominal basis, our expectations are that this will go up at a high single-digit rate over the coming decade or so.
As always, do your own research before making any investment decisions.
Sid Ruttala is an investment specialist within the TAMIM business. He has been actively investing on the ASX for over a decade and has a passion for reading and all things economics, stock markets and history.
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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.