Amcor’s interim result featured higher raw material costs that are affecting near term results. The company maintained its FY22 guidance and increased the buyback signalling confidence in the ability to generate free cash flow.
The interim result appears to have disappointed at the headline level, but higher raw material costs were slightly larger than consensus numbers had expected. AMC has the ability to eventually pass these cost increases through to customers, but it will take time and there is no clarity on when the headwinds will ease.
Free cash flow in 1H22 was US$105 million compared to US$276 million last year, mainly due to the timing of higher raw material costs on working capital. For AMC to achieve its full year target of US$1.1-1.2 billion of free cash flow, the pass-through of costs via price increases needs to be more snappy than previous years. Management remains confident it can achieve the FCF target in FY22 and the increased buyback program reflects that stance. The Board also increased the quarterly dividend to US12cps from US11.75cps last year (payment date 15 March 2022).
Flexibles sales of US$5,347 million increased 10% (+2% constant currency) and included approximately US$480 million of price increases related to higher raw material costs. Volume performance was in line with the same period last year. The better top line performance together with continued delivery of Bemis synergies should have delivered a stronger EBIT outcome, but a currency headwind did not help.
The top line for Rigids Packaging is improving strongly with volumes up 3% and accelerating. Capacity constraints held sales back, but some new capacity coming online will improve fill rates in 2H22.
Investment view
AMC is a defensive stock but it will take a little time to lift prices to offset the higher raw material costs that have swept through the industry. This remains an earnings risk if it cannot be fully mitigated but management appears comfortable on this issue.
Adjusted free cash flow is usually skewed to the second half year so the maintenance of FCF guidance suggests 2H22 will be even stronger this year. The additional US$200 million of buyback will not be spent until the back end of the year so it will likely benefit FY23 EPS onwards.
We think the initial reaction to AMC’s 1H22 result was a bit harsh given there are signs of stabilisation even though oil and aluminium prices are still climbing.
We have retained our Buy recommendation on AMC.
