Analysts at UBS says supply chain destocking points to a muted short-term earnings growth outlook for major packaging operations Amcor and Orora.
According to the company’s latest report, a more challenging US macro backdrop, alongside the normalisation of FMCG supply chains, sets a lower volume outlook for both companies.
UBS expects FMCG supply chain destocking activity to have dragged on North American packaging volumes, as customers adapt to a post-Covid operating rhythm.
It says this softer demand environment should allow packagers to dial down higher cost production activities, while benefiting from the recent decline in raw materials prices, such as PET resin and containerboard.
Efficiency gains and retention of prior period customer profitability improvements will therefore be key to maintaining earnings guidance for both Amcor and Orora, given the more challenging volume outlook.
As far as Amcor is concerned, elevated FMCG inventories and inflationary pressures are likely to weigh on first half volumes; UBS forecasts volume declines of minus one per cent.
However, slightly offsetting the reduced volumes should be lower PET resin prices, with US HDPE/LDPE contract prices down seven per cent.
UBS has a neutral rating on Amcor shares, with an A$18.25 12-month target. It is currently A$17.30.
For Orora, the UBS analysts are considering whether it can deliver North American EBIT growth in the current financial year.
Orora expects FY23 Group EBIT to be higher than last year, noting that this will be underpinned by ongoing growth in the North American business, given Australasian beverage EBIT is guided to be broadly in line with last year.
UBS is forecasting FY23 Group EBIT growth of plus two per cent. It says Orora expects to retain the benefits of prior period cost increases and profit improvement programs, despite the more subdued volume outlook.
According to UBS, recent declines in containerboard prices and US box shipping activity are consistent with the supply chain destocking activity it has been observing. It also has a neutral rating on Orora with a 12 month price target of A$3.25, up by 11 per cent from today's $2.98.
[Update since publishing: Amcor half year results reported here]
