General Discussion, page-33

Amcor Earnings: Cost-Cutting To Hasten Recovery in Operating Profit Margins

Aug 18, 2023
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We increase our fair value estimate for narrow-moat-rated Amcor AMC by 9% to AUD 17.50 per share. The upgrade is primarily driven by a weaker Australian dollar, and secondarily, a less severe cyclical earnings trough in fiscal 2024 than we previously expected. At current prices, shares screen as undervalued. We think the market is skeptical of a return to earnings growth in the second half of fiscal 2024. However, we believe Amcor has taken appropriate steps to cut costs and a stabilization of consumer demand is likely with inflationary pressure gradually subsiding.
The packing company’s fiscal 2023 adjusted net profit after tax of AUD 1,089 was in line with our estimate. The board declared a final dividend of USD 12.25 cents, bringing full-year dividends to USD 49.00 cents, representing a payout ratio of 67%. Holders of ASX-traded Chess Depositary Interests, or CDIs, will receive an unfranked final dividend of AUD 18.77 cents.
We have lifted our fiscal 2024 earnings estimate by 6% to USD 0.67, due to a less pessimistic outlook for consumer demand and Amcor’s cost-cutting initiatives. The very near-term outlook for packaging volumes remains challenging—across flexibles and rigids alike—with rising shelf prices still forcing shoppers to scale back their purchases of defensive products, and ongoing destocking by Amcor’s customer. Further earnings headwinds in the first half of fiscal 2024 are rising energy and labor costs, the loss of earnings from its divested Russian assets, as well as higher interest expenses.

However, the outlook for earnings growth in the second half is brighter. The loss of the Russian business in December 2022 will be cycled and interest expenses are unlikely to ramp further materially—assuming central banks are largely done with tightening, given easing inflation. The potential for Amcor’s customers to destock is also limited, and management expects this headwind to abate by early calendar 2024.