The share price of global packaging giant Amcor Limited (ASX: AMC) is down after the company flagged tougher operating conditions for the industry during its Annual General Meeting held today.
The outlook statement comes not long after Orora Ltd (ASX: ORA) announced through its FY2017 annual report that it had implemented cost cutting initiatives to offset rising energy costs.
So with a number of headwinds negatively affecting the industry, which ASX-listed packaging stock has the best prospects?
Pact Group Holdings Ltd (ASX: PGH) operates across seven countries, with the majority of revenues generated in Australia and through its rigid plastic and metal packaging business. Group revenue grew 6.8% in FY2017, however, this was due to acquisitions and otherwise would have been an overall decline of 2.8%.
Rigid packaging volumes were down in Australia and New Zealand amid subdued consumer demand and low economic growth in the region, while conditions across its Asian businesses were only slightly better.
Pact's balance sheet weakened in FY2017, partly due to acquisitions. The group's cash and liquidity position decreased, while inventory rose at a much higher rate than sales and is a significant concern should this trend continue. Pact's financial leveraging increased in FY2017 and currently trades on a P/E ratio of 19x.
Amcor is by far the largest packaging stock on the ASX, with a market capitalisation around $18 billion. The company generates 68% of sales through its flexibles business, mainly in Europe and Emerging Markets, while 32% comes from rigid plastics primarily from North America. Amcor's Australia and New Zealand business also contributes around 5% of group sales.
Group revenue was slightly lower in FY2017, though earnings rose sharply following the previous period's heavy write-downs on its Venezuelan assets. Political and economic instability in that country is a contributor to lower overall sales, though most markets are experiencing tougher operating conditions.
As well as continuing to make acquisitions worldwide, Amcor has closed eight facilities since June 2016 and implemented cost-cutting measures to improve efficiency and profitability.
Amcor grew its cash position in FY2017 though overall liquidity decreased. The company uses significant leverage to fund its operations and is trading on a P/E ratio of 23x.
Orora was spun-out of Amcor in 2013 and has significantly outperformed its larger competitor since listing. Orora has manufacturing and distributing operations spread across its Australasia (Australia and New Zealand) and North America segments. Sales are evenly split in Australian dollar terms across the two regions, though Orora has indicated it is postured for further acquisitions and growth in North America.
Orora has a stronger balance sheet using less leverage compared to Pact and Amcor, and improved its liquidity position in FY2017. The stock currently trades on a P/E of 24x.
Conclusion
Orora is my preferred option from these packaging businesses, due to its higher performance and stronger balance sheet. Although Orora is relatively more expensive than Pact and Amcor, I believe this is reflective of its growth prospects in North America, where overall economic conditions appear to be improving.
