Higher raw materials prices continue to feature in Amcor’s results, but the company is capably dealing with the challenge. Management has tightened its earnings guidance towards the top end although inflation is beginning to hamper free cash flow. The company is confidently heading in the right direction, but external forces, and a good lift in the share price, have combined to lower our recommendation to Hold.
AMC has been able to work around a supply constrained environment and raw material shortages in Flexibles by prioritising higher value products. While the former has placed a cap on volume growth opportunities, the latter has lead to a very favourable mix outcome. As resin supply begins to free up, these mix benefits will gradually be diluted as production of lower value products returns to normal.
The Rigids division returned to EBIT growth in the quarter after the prior two quarter were impacted by supply chain disruptions and raw materials availability. The business is expected to improve from hereon as new capacity additions, a build-up of inventory and potentially some easing in supply chain constraints contribute.
AMC is noticeably investing more to target higher value end-market segments. Healthcare and Medical investments in North America, Malaysia and Ireland have been previously mentioned but this list could expand. Capex guidance has been enlarged to 4-5% of sales from 3-4%.
The timing of higher raw material costs has had an impact on working capital. This has fed through to a softer free cash flow expectation for the year of US$1.1 billion which is the lower end of previous guidance. Further movements in raw material prices could still impact on the full year outcome.
AMC has two specialty carton plants and one flexibles plant in Russia. It also has one specialty carton plant in Ukraine. These businesses represent about 2-3% of group sales, and 4-5% of EBIT. The outlook for these businesses is plainly uncertain in the circumstances. The conflict is obviously affecting AMCs customers as well. AMC has not publicly made any substantive decisions on the future of these plants but is planning a range of scenarios.
Investment view
Underneath the maelstrom of inflation, higher raw material prices and supply chain issues, AMC’s business is coping very well.
Acknowledging the sturdy management effort, the result amplifies AMC’s defensive qualities.
The share price has run sufficiently for our recommendation to taper to a Hold.
Risks to investment view
The extent of input cost rises might be greater than anticipated. Customers might not be prepared to wear the associated prices increases. Demand might not be as strong as expected.
Recommendation
We have reduced our recommendation to Hold.
