Packaging may appear to be superfluous and wasteful, but because of the key role it plays in marketing and product protection it's a big business with lots of demand. The recent fall in Pact Group Holdings Ltd (ASX: PGH) has piqued my interest in the sector so I compared it to its closest rival, Amcor Limited (ASX: AMC). Here's what I found.
Operating environment
Amcor operates in all major markets globally which makes it more insulated from the business cycle of any specific market. In the current climate of a low Australian dollar this means earnings from offshore operations will be amplified.
Pact on the other hand derives the majority (70%) of its revenues from the Australasia region, with the balance coming from fast-growing Asia. Unfortunately this means the company is currently under a bit of a double whammy. The soft Australian economy is dragging on business, whilst the low Australian dollar makes the purchase of plastic resins, a key input, more expensive since it's quoted in US dollars.
Financial performance
Based on historical EBIT margins from the below table Pact has been more profitable per dollar of sales. However it would be just as noticeable that Pact's margins are on a downward trend. Amcor on the other hand has managed to improve margins by 2.8% in over four years, a great performance given the sluggish global economy over this period.
Since Pact listed in last December it has returned a solid 14% for its shareholders. Although this is nothing to sneeze at, it palls in comparison to Amcor's 36% return in the same period.
Growth outlook
Both companies produce plastic packaging for various end markets. Due to the fact they are lighter and more durable, plastic has been able to eat into the market share of other packaging materials. In fact the plastics market is forecast to grow at a CAGR of 5.2% through to 2020, whilst the sector overall is only forecast to grow at 4%.
Within the sector rigid plastics (i.e. water bottles) is expected to grow faster than its flexible (i.e. chip packets) counterpart. This gives Pact a slight edge because it derives the majority of its revenues from rigid plastics, whilst Amcor only derives 30%.
What to do?
Both companies will benefit from the increased demand for packaging as population and GDP increases. Pact has greater exposure to the rising middle class in Asia, whilst Amcor is likely to be the more stable performer. The pick between the two will boil down to your risk tolerance. Personally I favour Pact due to its stronger growth outlook.
On the valuation front Amcor is probably priced to perfection with a P/E of 20x so those looking to buy in might want to wait. Pact however is looking quite cheap at a P/E of 9x so those interested in the company should contemplate going in.
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