Why Pact Group Holdings Ltd shares just hit a 52-week low

Pact Group Holdings Ltd (ASX: PGH) shares hit a fresh 52-week low this week, as the market braces for the company’s half-year results announcement on 21 February.

Pact shares have fallen almost 30% over the past 12 months and currently trade well below the $5.28 price of new shares issued in December, under the firm’s retail entitlement offer. Those new shares were issued to help pay for the acquisition of two Asian packaging operations, just completed on 15 February.

Those combined purchases totalled $142 million and represent Pact’s largest acquisition since listing in 2013. The new businesses are estimated to quadruple Pact’s revenue generation in the region, but that expectation hasn’t been enough to prevent the company’s share price decline from almost $7.50 in May last year to now less than $5.00.

The downward pressure on the share price can partly be attributed to challenging conditions in the packing industry, with global leader Amcor Limited (ASX: AMC) recently pointing to rising input costs and lower earnings from Asian operations as part of its half-year results presentation.

At Pact’s Annual General Meeting last November, CEO Mr. Malcolm Bundey stated energy costs had increased significantly and that first-half FY2018 earnings before interest, tax, depreciation and amortisation (EBITDA) were likely to be broadly in-line with the previous corresponding period. The outlook for second half earnings was more positive, with expectations of higher contributions from the recent acquisitions and crate pooling operations.

Amcor spin-off Orora Ltd (ASX: ORA) also announced its half-year results recently and was another to highlight the issue of rising energy costs, though the company did manage to grow net profit after tax (NPAT) by 14.8% for the period. In addressing energy headwinds, Orora has entered into a long-term renewable energy purchase agreement and is continuing to undergo energy efficiency activities.

Although Orora is priced at a premium relative to its ASX-listed peers, I believe it is justified given the company’s recent performance, growth outlook, and balance sheet strength.

Pact is currently the cheapest of the three I’ve mentioned, with a trailing price to earnings ratio of 16, however I wouldn’t say the company’s shares are a bargain when compared with the broader market. Even though management expects little earnings growth this half, I believe a slight miss could send Pact’s share price down even further.

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Motley Fool contributor Ian Crane owns shares of Amcor Limited and Orora Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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