7 August 2020
Within the Australian equity component of investor portfolios, we have purchased Amcor (ASX:AMC). AMC is a global packaging company with operations across Australasia, North America, Latin America, Europe and Asia. AMC offers a range of packaging products for food, beverages, pharmaceutical and other consumer products.
We are positive on the medium-term outlook for Amcor for the following reasons:
- AMC’s earnings are very defensive with the majority of its products used in the fast-moving consumer goods and healthcare segments. In addition, it is one of the world’s largest packaging companies whose revenues are diversified by product, client, and geography.
- Although AMC’s top-line revenue growth is at a level similar to GDP, underlying earnings growth should be quite strong through the combination of strong operating leverage and ongoing capital management (buybacks). Strong cash generation also allows for a consistent dividend.
- The acquisition of Bemis, a global manufacturer of flexible and rigid plastic packaging for food, consumer products, medical and pharmaceutical companies, should enable AMC to capture both cost and revenue synergies over the next 3 years. It also provided scale, with AMC now the largest packing company in both the US and Europe. This will allow AMC to attract and retain clients that benefit from a global solution.
Continued focus on research and development is absolutely critical for AMC. With the focus on the removing single-use plastics and the ability to recycle goods, AMC will need to evolve its products to firstly maintain market share, and potentially generate a first-mover advantage in cost-effective responsible packaging. This is an enormous opportunity if management can execute upon it.
To fund the acquisition of AMC, we have sold Wesfarmers. Even though it is an excellent business, we believe it has benefited from a pull forward in sales due to Covid-19 and is also achieved our 3yr forward target price.
In summary, we view Amcor as a high-quality business that we have acquired at a sensible price, a combination that is not common in the current environment.
If you have any questions or would like more information, please refer to the attached note or contact your Elston Representative.