Financial Analysis of AMCOR and CPI
Amcor is an organization, which is moving forward with a lot of clarity in its vision and mission. All the consolidation activities whether they are busy expanding through acquisitions in hither to virgin markets or divesting of non-core business to arrange for cash flow, all point to a unified vision and well-defined goal. Though Amcor’s precursor Australian Paper Manufacturers started in 1860s by Samuel Ramsden, a stonemason from Yorkshire, it added several packaging related activities in the 1970s and 1980s. In 1986 Australian Paper Manufacturers Limited was re christened as AMCOR.
Over the past decade Amcor has undergone a drastic restructuring and rationalization. Amcor Europe formed in 1997, which underwent a huge transformation in 2001 by mergers with Danisco Flexible and Akerlund & Rausing to form Amcor Flexibles Europe. These are steps to describe where Amcor’s corporate vision is leading it up to. Amcor papers was demerged in 2000 and it is independently traded under the name of PaperlinX Ltd. Subsequent acquisitions of PET and closures business of Schmalbach- Lubeca, and Tobepal.S.A, Spain have made Amcor the global leader in its chosen direction. More recently Amcor has acquired Alcoa in Latin America giving it a head start in the fast growing business for packaging of carbonated drinks and followed it up with a similar market defining acquisition of Arca in Mexico. It has recorded healthy figures of around $11000 AUD in sales and around $1250 AUD in profits before taxes (PBITDA)
In sharp contrast CPI Inks is a relatively young company founded in 1977 by the late Mr. Peter Sajet and Mr. Daryl Lea. The company was founded with the underlying principle of providing advanced service and product to the customer and always tries to stay ahead of the competition. CPI has added inks and several types of specialized papers to its repertoire. CPI s has major presence in Australia and in its trans Tasman business partner, New Zealand.
The examination of the two companies’ financial reports reveals several interesting observations about the present and future of the organizations. While both the companies have had to deal with changes in the market environment, the philosophy or the attitude of the management towards the steps to be taken or the vision to be adopted have been drastically different.
While Amcor has been aggressively but silently going about in its stated pursuit of excellence in the packaging and PET space by shedding any excess baggage in terms of synergies that do not contribute towards the rationalization, CPI Inks has been pondering its existential question of whether to scale up and globalize to thwart international dumping practices which have jeopardized the profitability of trans-Tasman operations.
The Annual reports of both the companies have rather boldly put forward, in no uncertain terms the challenges facing the industry in pricing and profitability.
While Amcor suffered negative growth in some segments of the Financial spectrum due to increased costs of raw materials, CPI Inks suffered erosion of profit margins due to dumping and competitive advantages of start-up operations making use of off shore capacity.
In the case of Amcor, the higher profits in stabilized markets of North America in it s PET division were offset by lower margins and lower profits from its Mexican operations and the like where post acquisition measures are still taking place. Across the three main verticals of PET packaging, Amcor Australasia and Amcor Flexibles there has been negative growth in PBIT due to the varies factors mentioned above. Only Amcor Sunclipse and Amcor Asia showed a positive growth in PBIT, which is a very good indicator of comparative performance over the previous financial year.
On the same scale the performance of CPI inks seems a little subdued s the growth over the previous year has not happened in the direction or at the pace investors or the management would have liked.
Analysis of the financial statements
Major components that give a clear picture of the Company’s health are
Working Capital, Current Ratio, Quick assets ratio and Debt to Equity ratio.
On the Balance sheet of both the companies working capital or Net assets are substantial within their scale. Amcor has 3572 million AUD while CPI has a working capital of 54.778 million AUD.
The current ratio, which is the ratio between total assets to total liabilities, the companies are very similar with a ratio of 1.54 for Amcor and 1.56 for CPI
Quick assets ratio of the smaller company is disturbing at 0.91 where as Amcor is safely ensconced above 1, which the fraternity of analysts feels, is a comfortable benchmark.
Debt to Equity ratio again shows similar figures for both Amcor and CPI.
The following ratios can be deduced for Amcor from its Income statement
Gross profit margin 15.50584
Operating cost ration current year 84.49416 (9329/11041*100)
Operating cost last year 83.15
Net profit ratio = 3.43447 (379.2/11041)
Net profit ratio for the last year 2.42
P/E ratio 14.28 (700/49)
Though there is a huge variation in terms of size and volume apart from Market capitalization, the companies Amcor and CPI Inks are in similar positions in their performance at least as reflected by the analysis of their annual reports and Financial statements. However from an investor’s point of view there are two differing options that need to be considered before committing any monetary resources into the equity of the companies.
The factors in favor of CPI Inks are that it is mid cap company which is fairly insulated from the vagaries of the international market, though it is exposed in competitive ness to international market trends. The predictability of the market and the cost effectiveness factor essentially because of its localized presence and its specialized core competence allow it the luxury of being better prepared for any downturn in the market conditions.
By the same token, Amcor is integrated into the world markets and its profitability, bottom line and cost effectiveness are open to the fluctuations that are beyond its control. Even in the current year the Mexican market downturn has adversely affected its profit and P/E ratio. The exposure to international markets, apart form affording global presence and scale of operation brings with it the dangers of instability and unreasonable upheaval. The political instability of Latin American countries, and Mexico or the economic embargo of the European countries on Iran and Iraq can have far reaching effects on the sales performance and the stock market performance of Amcor. Therefore it seems advisable to invest in the madcap segment like CPI Inks and be satisfied with moderate returns than take on uncontrollable risks by investing in Amcor.
But by the same logic, since CPI has limited market and it cannot fall back on any other subsidiary or operation to bail it out in times of dismal performance is a huge potential risk. As stated by the chairman in the annual report CPI is on the threshold of taking measures to scale up its operations. It is ironical that the down turn in market profitability of its paper segment actually boosted its machinery division though its contribution to the bottom line in the current fiscal has been nominal. CPI is open to the risk of being easily obliterated by any concerted efforts of the competitors and international competition. Any international Paper company would find Australia and New Zealand market an open invitation to scale up its operation (similar to what Amcor is doing in the PET business in countries like Spain, Latin America, Europe and Mexico). Amcor has embarked on a journey for a company of its size, which seems almost inevitable. Mergers and Acquisition activity has been hotting up in all fields ranging from Steel to Finance and take overs of hither to independent companies has been the order of the day. The merger activity is aimed at bringing together the synergies of the two entities and harmonizes the capabilities into a whole whose sum is greater than the parts.
Any investment decision to be taken about these two companies should take into consideration the wisdom of some of the latest decisions taken by the company and the performance of the shares in the bourses.
As discussed in the Management analysis of Amcor annual report for FY’ 06, the profits have more or less stagnated at the levels consistent with the last four years despite the company taking aggressive steps to consolidate its standing in the international market in its declared intent of being among the global top three of PET industry. Therefore, more than the actual profit, it is interesting to see the value addition in human and knowledge capital that has been accrued in the recent years (in the single vertical) and the scaling up of its global capabilities that allow it to match the competition in profitability and time to market considerations.
On that account CPI is relatively cocooned in the activities typical to a mid cap company and has relative predictability and at the same time lack of exciting action at the stock exchange which can interest speculators. As a long-term investment CPI may be fair risk but it needs to be constantly monitored as it might itself fall prey to the global ambitions of a larger corporation envisaging interest in the Australasian market. Besides the dividend or earning per share is not very encouraging to take up the case of CPI unless there is a bullish sentiment on the immediate plans and future of the company.
Investing in Amcor would be a wise decision but fraught with the regular dangers of the international or transnational corporation (Amcor has already transformed into one on global reach though the revenues are yet to justify the spread and scale). For any investment made in Amcor there is an equal chance of making profit on speculation given its exposure to international volatility. For a long-term investment Amcor must be considered a reasonably safe option because it has cushion in scale which can afford it an insurance against a few turbulent years (which can obliterate lesser companies). Besides the earnings per share of Amcor is healthy at the given rate and shows all signals of continuing at the least similar performance for the next coupe of Financial years till it integrates all its components into a seamless whole.
The clincher can however be found in the objective study provided by ASX (Australian Securities Exchange) which provides for the market performance of all companies in the last six months and the scales seem to tilt heavily in favor of Amcor unless there is a specific bullish sentiment attached to the growth prospects of CPI.
Performance of Amcor Shares in relation to the S&P and the overall performance of the market as illustrated in figure below shows that in spite of the upheavals of the consolidation of its international operations, Amcor has almost always held true to the market index and has not led to too much erosion of stock holder or stock speculators’ wealth.
As depicted in the figure below, CPI Inks has been going through a rather lean patch at the bourses falling considerably below the S&P graph and performing well below the industry average performance as well. Given the fact that it is a fairly mid sized company the repercussions of its down turn have not been drastic on its investors.
Since investment in any stock is a decision not solely based on the financial ratios but also on the overall philosophy and the outlook of the particular industry and economy in general, it becomes essential to undertake detailed research such as this to decide investment commitments in any particular company.
Though some non-believers liken investing in Stock market to playing the Russian oulette, it still pays to be prepared and well –informed.