Tobacco Regulation Drives Amcor Profit Higher

Source from:  The Australian Financial Review 02/15/2016

The global war against smoking proved a winner for packaging giant Amcor in the six months to December, as tobacco companies pulled forward inventory to circumvent tougher regulations.

Amcor's defensive qualities shone through in the first half, according to chief executive Ron Delia, who said emerging markets performed well despite the global volatility in financial markets.

Ahead of the results, there was concern among analysts that Amcor would not be able to cope with the headwinds in emerging markets and the pressure on its rigid plastics business in the United States.

But Delia, who works out of an office in Zurich, managed to achieve results at the upper end of the company's objective of delivering 10 to 15 per cent shareholder value creation.

In the six months to December, the value creation was 14 per cent, which was comprised of dividend yield of 4 per cent, constant currency profit after tax growth of 7 per cent and reduction in shares on issue of 3 per cent from a $US500 million share buyback.

The tobacco packaging business benefited from a looming crackdown on packaging in Europe. In Russia and Turkey, there was a pull forward of demand ahead of tax increases on January 1, 2016. In other European countries, demand was higher ahead of the implementation of the Tobacco Packaging Directive.

PLAIN PACKAGING

The UK and France are following Australia's lead by introducing plain packaging but the two countries only account for about 4 per cent of sales. The pull forward of demand has not stopped Amcor from issuing a forecast of modest growth in the second half.

Delia says the introduction of plain packaging is not necessarily bad for Amcor because the packages still required sophisticated images.

Amcor has managed to escape the sort of intense scrutiny from anti-smoking activists that has plagued companies selling cigarettes. But pressure is building on fund managers with any connection to tobacco.

Amcor's latest result benefited from a pick up in its rigid plastics business in the US thanks to higher demand for soft drinks sold by Coca-Cola and Pepsi.

The emerging markets operations proved to be resilient during the half year. Amcor earns about a third of its sales from operations in 27 countries. It has 80 factories in emerging markets.

Delia says the company's acquisition strategy is proceeding well with about six deals completed in the first half of the year.

The pipeline of deals numbers several dozen. That should result in another six transactions in the half year to June.

During the latest half, Amcor bought businesses in South Africa, Brazil, India, the US and China. Also, the company built new plants in Indonesia, the Philippines and the US.

Currency movements worked in favour of Australian investors. Enditem