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Pact Group Holdings Ltd smashes profit expectations: Is now the time to buy?

What: Recently-listed rigid plastic packaging supplier Pact Group Holdings Ltd (ASX: PGH) on Wednesday reported net profit for the year to June 30 that beat expectations and the group’s prospectus forecast issued in December last year.

Interestingly, the share price fell around 1.5% in early trade as investors digested news that growth will be hard to come by in the 2015 financial year. Shares fell to $3.81 after hitting an all-time high of $3.86 on Tuesday, which capped a 16% rise in the share price in 2014, compared to a rise of just 5% for the ASX 200.

So what: Pact listed on the ASX in late December 2013 at $3.80. The shares quickly dropped to $3.50 and have spent the majority of the last nine months below the issue price until a 10% rally between July and yesterday sent the shares surging to an all-time high.

The 10% rally in the share price over the last month essentially robbed the company of a huge jump on Wednesday as the majority of positive variation was previously flagged to the market. Pact achieved net profit after significant items of $57.7 million compared with just $25.2 million predicted in the issue prospectus, however a positive tax benefit of $19.2 million and lower IPO costs had previously been announced to investors.

What now: Since June 30, Pact has acquired Sulo Group and flagged a desire to make further acquisitions should opportunities present themselves.  This is expected to drive a 5-10% increase in earnings per share over the next 12 months, however growth in the group’s existing operations is expected to be negligible in Australasia and in line with GDP in the US.

Australasia accounts for around 72% of group revenue and low-growth conditions will place more emphasis on acquisitions, product innovation, productivity improvements and process simplification. CEO Mr Brian Cridland noted that these factors and successful integration of acquisitions had resulted in the positive profit result last year.

For me, the concerning factors in the result include the loss of a major Australian contact (presumably to main rival Visy), and soft agricultural sales due to drought. International sales increased by 10% to now account for 28% of revenue, boosted by the inclusion of three Asian businesses added during the IPO. This is a positive sign.

Pact is currently trading on a price to earnings ratio of 11 and a trailing dividend yield of 2.5%, however this included only one dividend for the year. Analysts are expecting a yield of 5.5% next year based on the current share price.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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