What Investors Are Missing With The Amcor And Bemis $6.8bn Merger And Why Significant Downside Risks Exist

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About: Amcor plc (AMCR)
by: Ben Axler
This article is exclusive for subscribers.
Ben Axler
Hedge fund manager, long/short equity, tech, large-cap
Summary

Amcor and Bemis, two packaging companies, completed a $6.8bn merger in June 2019. Complicated financial reporting between AAS and GAAP, divestitures, and two different fiscal years, obscures underlying results.

Analysts believe Amcor grows 1-2%, but our analysis suggests both companies are organically declining 3-4%. Amcor obscures its ~10% of tobacco cartons sales, a market declining 5%+.

Amcor also makes PET bottles for PepsiCo and plastic bags. Both products are under pressure. Amcor's cost-cutting ambitions are aggressive, and we believe behind plan.

We estimate Amcor's FCF fell 51% from 6m 2018 to 6m 2019. Its stock buyback puts the dividend at risk of reduction. Cash liquidity is not clear because of restricted cash and overdrafts.

Amcor trades at an in-line valuation with other packaging peers. Yet, we believe it should trade at a discount as its organic sales growth is sharply negative, and margins below peers. Westrock/Kapstone is a perfect comp for troubled packaging mergers. At 1.0-1.2x EV/Sales, Amcor would have a 40-60% downside risk.

Report Entitled: "A Core Short"

We are pleased to issue a report on our website outlining our concerns about how Amcor plc ("AMCR") faces 40% - 60% downside risk to approximately US$3.60-$5.40 per share. Below