(The following statement was released by the rating agency)
SYDNEY, August 02 (Fitch) Fitch Ratings says global packaging company, Amcor's
Limited's (AMC; BBB+/ Stable), decision to divest its Australasian and Packaging
Distribution business (AAPD) is unlikely to impact its rating.
Based on the limited information made available yesterday, Fitch expects the
divestiture to positively impact AMC's financial profile, profitability and
operating cash flows. These benefits will come at the expense of a modest loss
in diversification. This initial assessment will be followed by a review of the
rating when AMC releases further information in relation to the financial
profiles and capital structure of AMC post the demerger.
The demerger makes sound economic sense as AAPD does not fit into AMC's strategy
of extracting premium returns on capital from market dominance. AAPD's fibre,
paper and packaging business competes on price with Visy in Australia, which has
a cost advantage over AMC's fibre business owing to its integrated business
model. Price competition has intensified following prolonged weakness in
downstream demand for domestically packaged fast moving consumer goods (FMCG).
The domestic FMCG sector is facing a challenging economic environment with
increased substitution by imported goods and off-shore packaged home branded
goods. AAPD's EBITDA margin of 10% and return on adjusted funds employed of 9.3%
lag those of AMC's flexibles (13.5, 23.9% respectively) and rigid plastics (17%,
15.5% respectively) businesses.
There is a long lead time to extracting returns from AMC's AUD500m investment in
the new paper recycling plant at Botany. The opening of Botany Mill ran 10 weeks
behind schedule due to bad weather and costs were adversely impacted by
construction delays. The plant is currently operating below capacity. AMC
estimates it will take two years before optimal plant capacity is reached.
AMC's financial metrics remain within Fitch's negative rating guideline even
under the assumption that AMC retains all of the debt associated with AAPD.
Under this assumption funds from operations (FFO)-adjusted leverage will return
to 2.7x by 30 June 2014 (FY14) which is within the negative rating guideline of
Fitch expects AMC to improve its current leverage metrics post demerger. The
disposal of AAPD will most likely include the debt associated with the recently
completed Botany plant. Assuming that AAPD's capital structure is modelled on
AMC's, the divestiture would shave AUD1bn off AMC's AUD5.2bn adjusted debt. In
this scenario FFO adjusted leverage will fall to 2x in FY14 (2.5x under the
pre-demerger rating case)
Diversification losses are minimal. AAPD represents 18% of group EBITDA and
provides the group with some geographic (Australasia) and product segment
(fibre, metal and glass) diversification. However, the strength of AMC's credit
profile is derived from the strong defensive characteristics of its cash flows,
with 85% of sales (pre-demerger) derived from defensive consumer staples markets
such as food, tobacco, healthcare and pharmaceuticals. Its European revenues are
amongst its geographically most defensive, with volumes in this segment expected
to be resilient to the financial stress in the region. Cost leadership, AMC's
ability to pass through the majority of input cost fluctuations, an extensive
and well-diversified manufacturing footprint, and its strategic position in its
customers' value chains also support the rating.
+61 2 8256 0348
Fitch Australia Pty Ltd.
Level 15, 77 King Street, Sydney, NSW 2000
+61 2 8256 0321
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