for a defensive stock.

Packaging power plant
Author:Tim Knapton
Date: March, 2004



The last trading year was characterised by a huge rally in cyclicals, small caps and tech plays, and the likelihood is that at some point during this year investors will start to adopt a more defensive posture. In turn, that would spell a re-rating of safer blue chips.

Amcor is among the safest available. Because it is a truly international business the key risk has been currency. The strength of the Australian dollar that has brought back the share price by 12 per cent since last September. That is an adequate reflection of the translation impact on the company's bottom line, and so the stock offers attractive fundamentals for those who believe there is a limit to how much higher the domestic currency can go.




Amcor's global business embraces some 238 plants over 42 countries, and that includes over 80 flexible packaging plants in Europe, over 30 PET plastic packaging plants in North and South America, about 20 flexible packaging plants in Asia and over 50 plants in Australia and New Zealand.

The most protective aspect of the business is its ability to leverage further scale efficiencies and the fact that three-quarters of its ultimate demand is sourced from food, beverage and tobacco consumption. Last fiscal year, for example, the group expanded its PET volumes by 11 per cent, despite relatively sluggish economic growth.

Another financial buttress comes from the group's market-leading position in many of its core markets, both from a scale and technology perspective. Turnover this year will comfortably exceed $11 billion, and while the group EBITDA margin is likely to be just less than 13 per cent, it ranges from as high as 22 per cent in Australia to less than 10 per cent in Europe. Amcor has tended to grow by buying businesses that have relatively constrained margins in isolation but that have scope to eke out better returns as part of the larger group. The recent $330 million acquisition of Rexam's global healthcare flexible packaging business is a good example, as are the small PET players that Amcor continues to add to its globally leading portfolio in that segment of the market. Rexam was transacted on 6.5 times EBITDA and adds $500 million to the revenue base, with significant synergy potential. It makes Amcor the leading player in packaging for sterilisable medical products - a strong growth niche.

Amcor has also made much larger strategic moves aimed at rationalising industry capacity. Prime examples were the merger almost three years ago of Amcor's European flexible containers business with those of Scandinavian industry giants Danisco and Akerlund & Rausing, and the $2.7 billion takeover of European major Scmalbach-Lubeca in 2002. Those manoeuvres gave it almost 20 per cent of the total European market. Synergies have been reaped through plant closures and elimination of duplicated resources in administration, procurement and sales. The European industry is characterised by excess capacity, which it will continue to fix.

The solidity of Amcor's growth strategy was evidenced by the fact that last fiscal year the group managed to expand earnings per share by over 20 per cent (after reversing out restructuring charges) while adding over 25 per cent to its global sales magnitude. The Scmalbach acquisition was a major earnings driver along with good volume growth in Australian box volumes. The result was restrained by continued problems with the Sunclipse operation in the US and sluggish trading conditions in Asia. Both are expected to show improvement this year and next, and so should add to earnings momentum. The three months to September 30, 2003 yielded a profit increase of 4 per cent, despite the appreciation of the currency - and that augurs well for future trading results.

Organic growth is being pursued through newer product lines such as energy drinks, while annual capital expenditure of over $500 million is upgrading recycling, bottling and moulding facilities. The group can afford to keep spending internally and externally; this year, the debt to equity ratio is likely to ebb back below 50 per cent and interest cover will move above 4 times.