NEW YORK, March 10, 2020 /PRNewswire/ -- Report entitled "A
Core Short" outlines how Amcor plc ("AMCR" or "the Company") faces
40%-60% downside risk to approximately $3.60-$5.40 per
share. The full contents of the report can be reviewed at
www.sprucepointcap.com. Amcor is a roll-up, and newly created
S&P 500 company, formed through a stock-for-stock merger
between Amcor (Australia) and
Bemis (U.S.). Its shares trade on both on the NYSE: AMCR and ASX:
AMC. As two companies in the global packaging industry with large
exposure to the consumer and beverage industry (PET bottles,
plastic bags, tobacco), we believe Amcor is facing cost and revenue
challenges as the world moves toward healthier and more
environmentally conscious solutions. 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. 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.
- An "Organic" EPS Growth Story Through Suspect Cost Synergies
and Obscured Tobacco Dependence: Nearly 10% of sales are tobacco
cartons, yet Amcor's recent SEC filings and investor presentations
disclose "tobacco" zero times! Based on our research, we learned
that tobacco cartons once accounted for up to 30% of Amcor's
EBITDA, and may generate margins 1,000bps higher than other
businesses. Tobacco sales are declining mid-single digits globally,
and Amcor has obscured its goodwill and entities associated with
tobacco packaging acquisitions. Amcor even changed its goodwill
impairment testing from "quantitative" to "qualitative" factors in
2019. Goodwill accounting is a current hot topic for the SEC, which
is investigating Newell Rubbermaid.
Other dependencies include plastic bottle sales to Pepsi (~8%
sales), and packages to Kraft Heinz (~3.5% sales), which is also
under SEC investigation. Amcor claims $180m of Bemis deal cost synergies and avoids
discussion of sales synergies. Based on our analysis, deal costs
are rising faster than planned, and sales are vanishing. Our
analysis suggests both Bemis and Amcor sales are organically
declining 3.0% - 4.0% and its cost synergy targets, relative to
other industry deals, are very aggressive. Amcor's claim in
Feb 2020 that it's increasing cost
synergy guidance from $65m to
$80m appears dubious in light of
evidence that R&D spending is running $35m below plan. Amcor was adamant at the deal
announcement that cost synergies would not include R&D
cuts.
- Signs of a Cash Crunch Calling Into Question Management's
"Enhanced Financial Profile" Claim: We believe Amcor presents an
inaccurate view of its cash by obscuring clear presentation of
rising cash overdrafts and restricted cash. Recently disclosed
European filings (30% of sales in Europe) show that Amcor's cash pool fell into
a deficit after a multi-year surplus. Amcor claims rising volumes
in Europe, yet didn't disclose
intentions to shut two Flexible facilities in Finland. Rising dependence on cash overdrafts
has been a major harbinger of financial strain in companies we've
warned about (notably XPO and Maxar Technologies), and also played
a part in the collapse of the scandal at MDC Partners. Amcor is
also intensifying its use of commercial paper (CP), a risky
strategy given it was recently downgraded by credit agency Fitch,
and as a BBB credit, is close to junk status. As a junk credit,
Amcor's access to the CP market could be restricted, its cost of
capital rise, and its liquidity reduced. Amcor embellishes its
liquidity by claiming its CP is "long-term" debt, but we believe it
should be viewed as short-term.
- Why Free Cash Flow Won't Improve and The Dividend Is At Risk:
In its recent quarter, Amcor became more aggressive with add-backs
in its free cash flow presentation, a classic sign of strain. 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). Amcor has said that
its 3.5% capex to sales spend is "a healthy amount", but based on
our analysis, the average industry capex spend is 5.5%. While all
Amcor's close peers maintain or increase capex spending, we believe
Amcor is materially underinvesting in the near-term, a strategy
that will depress future free cash flow. Pre-deal Amcor said it
required $400m of annual capex to
maintain organic growth. However, our analysis shows legacy Amcor
capex is running 30%-35% less. We believe Amcor will soon face a
crossroads in its financial strategy between completing a
$500m share repurchase program,
increasing capex to remain competitive, and paying a generous
$725m/year dividend. Absent a
suspension of repurchases, we believe Amcor will be unlikely to
maintain its current dividend.
- Leverage Is Greater Than It Appears: Amcor does not
include leases in its presentation of Net Debt to investors. Leases
currently amount to $580m, and are
now recorded on the Company's balance sheet. In addition, Amcor has
$354m of unfunded employee benefit
liabilities. Going against Financial Accounting Standards Board
guidance, Amcor does not clearly mark restricted cash amounts in
its cash flow statement. On the surface, the Company tells
investors it is levered 2.9x Net Debt / PF Adjusted EBITDA, but
with these basic adjustments, we estimate leverage is 3.3x.
- A Poor Risk/Reward Investment Opportunity: Amcor's valuation is
in-line with industry peers, but should trade at a discount to
reflect our documented concerns about the accuracy of its financial
statements, fragile financial condition and unsustainable dividend
policy. Amcor investors should study the recent $5bn Westrock/Kapstone packaging deal as a
comparable example of what to expect. The combined company has
repeatedly missed sales forecasts, and is now expected to decline,
resulting in significant multiple contraction. Westrock is
comparably levered to Amcor, has higher margins, and also has a ~5%
dividend yield. If we applied Westrock and its closest peers' sales
multiple of 1.0x – 1.2x to Amcor, it's easy to justify 40% – 60%
downside risk to Amcor's share price.
Spruce Point Capital has a short position in Amcor (NYSE: AMCR)
and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Daniel Oliver
Spruce Point Capital Management
doliver@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC