The AMCOR PLC (ASX: AMC) share price tumbled to a four-year low this morning and it’s something more sinister than the coronavirus that’s hammering the global packaging giant.
The Amcor share price crashed 4.6% to $12.90 when the S&P/ASX 200 (INDEXASX: XJO) shed 1.2% of its value at the time of writing.
Yesterday’s euphoria that sparked a big market bounce is wearing thin and investors shouldn’t expect the wild swings to end anytime soon.
A new bogeyman
But Amcor shareholders have a new worry to contend with. The company, which merged with its US peer Bemis, is being targeted by a US short-selling fund called Spruce Point Management.
The short-seller issued a report warning that Amcor’s profits and dividends are under threat. It also questioned the credibility of Amcor’s financials, management and governance.
“Based on our forensic review of the deal rationale touted by Amcor, we are able to disprove or question a majority of its promotional selling points,” said Spruce Point.
“We also believe Amcor is obscuring significant financial strain (organic revenue decline 3.0% – 4.0%, cash overdrafts and cash flow contraction) that will place its dividend and BBB investment grade credit rating at risk.
“We see 40% – 60% downside risk as investors recalibrate the long thesis.”
Up in smoke
One of the key reasons why Spruce Point thinks Amcor’s organic growth is sliding backwards is because falling tobacco sales. The fund believes that nearly 10% of Amcor’s sales are tobacco cartons and is something that the group has not disclosed.
These cartons generate better margins than other packaging products, so even a modest decline could significantly hurt its bottom line. This also raises the question of a potential write-down in goodwill, according to Spruce Point.
Cash weaker than reported
Further, the short seller accuses Amcor’s management for hiding its true cash position by not being transparent about its uses of overdrafts and “restricted cash”. The latter is cash that is needed for working capital.
The report said Amcor’s credit rating was downgraded recently to BBB. That’s close to “junk” status. If it gets downgraded further, it could limit the group’s ability to raise debt funding.
“In its recent quarter, Amcor became more aggressive with add-backs in its free cash flow presentation, a classic sign of strain,” added Spruce Point.
“The CFO claims cash flow will seasonally improve through June 2020 (2H’20), but this conflicts with an on the record statement by Bemis’ CEO before the deal closed that its strongest cash generation is in Q3 (June-Sept).”
The biggest issue
In this environment when the issue of debt is again becoming a sore point with investors, the short-seller warns that Amcor’s leverage is greater than what the company is reporting if you included its lease liabilities.
It also noted that Amcor’s execs only own a “measly” 0.2% of the stock, so it couldn’t be said that their interests are aligned with those of shareholders.
It’s this last point that worries me the most. I am not fully convinced on some of the other arguments that Spruce Point has put forward.
Afterall, the fund will benefit financially when the stock falls, as it’s doing right now. The report is self-serving and needs to be reviewed in that light.
What’s clear though is that Amcor needs to issue a rebuttal to the short-sellers many allegations.
Amcor isn’t the first to be hit by a short-seller’s report. In more recent times, the Corporate Travel Management Ltd (ASX: CTD) share price and WiseTech Global Ltd (ASX: WTC) share price have been hit by similar reports.
Our share market operator ASX Ltd (ASX: ASX) is pushing the corporate regulator to take action against foreign short-sellers who “ambush” ASX listed companies.