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RPT-Correction: Fitch affirms Amcor at 'BBB+'; outlook stable
October 28, 2013 / 6:54 AM / in 4 years

RPT-Correction: Fitch affirms Amcor at 'BBB+'; outlook stable

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Oct 28 (Reuters) - (The following statement was released by the rating agency)

This announcement corrects the version published on 16 October 2013, which misstated the costs involved in the Botany paper mill in the fifth paragraph.

Fitch Ratings has affirmed packaging company Amcor Limited’s (Amcor) Long-Term Issuer Default Rating (IDR) at ‘BBB+'. The Outlook is Stable. Fitch has also affirmed Amcor’s senior unsecured notes at ‘BBB+'.

KEY RATING DRIVERS

Exposure To Resilient End-User Markets: Amcor derives 85% of sales from defensive end-user markets such as consumer staples, healthcare, pharmaceuticals, and tobacco. Amcor’s exposure to these markets will increase to 94% post the proposed demerger of its Australasian packaging and distribution (AAPD) announced in August this year.

Volumes To Stabilise: Moderation in customer in-housing of carbonated soft drink and water (CDSW) volumes; absorption of excess capacity in the New South Wales (Australia) fibre packaging market and increasing exposure to developing markets will support organic volume growth in FY2014.

Stable Profit Margins: Amcor has contractually supported cost-pass through to its customers in the Rigid Plastics and Flexibles segments. These businesses represent 76% of Amcor’s pre-demerger revenues. There is minimal contracted cost-recovery in Australasia where EBITDA margins of 9% trail the margins of Amcor’s other segments by between 5-6%. Hence, post demerger margins are likely to rise above 14%.

Botany Adds To Leverage: Fitch estimates Amcor’s net investment in a new recycled paper mill in Botany, New South Wales was approximately AUD300m. The final net investment is about AUD70m higher than when Amcor made the initial investment announcement in February 2008. The plant commenced commissioning in October 2012 and Fitch estimates a total gross cost of AUD520m. Amcor estimates it will take two years before the plant reaches capacity and yields cost savings of AUD50m per annum.

Leverage Exposed to Currency Mismatch: Amcor’s tax effective capital structure results in 44% of net debt and 30% of revenue being denominated in US dollars, where the corporate tax rate is 40%. Amcor euro based earnings attract an estimated average corporate tax rate of only 27.4%. Amcor’s leverage is therefore exposed to the appreciation of the US dollar. Currency translation accounted for AUD350m of the AUD417m increase in net debt in FY13.

Post de-merger leverage to Fall: Fitch expects the AAPD to support up to AUD750m in debt and to reduce FY2013 EBITDA by AUD268m, which will have a marginal deleveraging impact since AAPD’s exit leverage (debt to EBITDA) of 2.8x is slightly higher than the group leverage of 2.71x. FFO adjusted net leverage is expected to fall from 3.40x in FY2013 to 2.93x in FY2014. Gross leverage is expected to fall from 3.66x to 3.37x over the corresponding period. Moreover Amcor’s internal metric - gearing (net debt to net debt + equity) - is expected to increase to 53.4% post de-merger from 51.7% in FY2014. This is above its mid-range guidance of 45% to 55% for gearing, and will put downward pressure on the absolute level of Amcor’s debt.

Acquisitive: The high likelihood of leveraged bolt-on acquisitions continues to apply downward pressure to the ratings. Acquired scale is an essential ingredient in the success of packaging companies owing to the monopolistic structure of this industry.

Shareholder Friendly: Fitch applies a 5% annual average growth rate to Amcor’s dividend pay-out over the next five years. Amcor increased its dividend pay-out by 8.1% to 40 cents in FY13, up from 5.6% in FY12. In FY12, despite the intensity of investment in recently completed major transactions, Amcor engaged in a share-buyback of AUD150m.

RATING SENSITIVITIES

Negative rating actions may result from the joint and several occurrences of the following events:

-An increase in (FFO) adjusted gross leverage to greater than 3.0x on a sustained and projected basis.

-A fall in EBITDA margin to below 14%. This guideline has been revised upwards to reflect the higher blended margin of Amcor post demerger.

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