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Amcor resists global downturn in consumer spending

Amcor“s containers and packaging business is standing up well to the global decline in consumer spending because demand for food and drink tends to remain steady when consumer confidence falls. In th…

Amcor“s containers and packaging business is standing up well to the global decline in consumer spending because demand for food and drink tends to remain steady when consumer confidence falls. In the midst of the current bear market, institutional investors and analysts are remaining faithful to their January 2003 predictions that packaging giant Amcor is likely to come through the stockmarket storm better than most other large-cap stocks. Since Amcor announced in February 2003 an interim net profit after distributions to preference shareholders of AUD 150.1 million, its share price has outperformed most other S&P/ASX100 stocks, falling only 3% to about AUD 8. Demand for food and drink tends to be less affected than for other goods when consumer confidence drops, as it has done in most OECD markets in the past year. The new wine bottle plant in South Australia is producing results. It is set to post a profit of about AUD 12 million in 2003. Amcor invested AUD 140 million to set up the wine bottle operation, which is challenging the market dominance of ACI. One analyst commented that investors were concerned about Amcor“s entry into the glass bottle packaging segment when it first announced its decision in 2001 but the support of the wine industry and the efficient new plant suggested Amcor could achieve a 15% rate of return by year two of operation. The European flexible packaging and plastic container operations, which are anticipated to account for 26% of group profit in 2003, are considered particularly defensive from an earnings point of view. About 80% of European sales of flexibles are to the food and beverage industry, and the rest goes to pharmaceutical and non-food sectors. Of vital importance to future earnings will be how quickly Amcor is able to integrate German plastic containers company Schmalbach-Lubeca into the group. Following the AUD 2.9 billion acquisition, Amcor is now the world“s largest plastic bottle and container (PET) manufacturer. Analysts believe Amcor has taken a “first-mover advantage” in the anticipated consolidation of the international packaging and containers sector. One of the main benefits of Schmalbach-Lubeca joining the group is that its balance sheet was carrying almost AUD 300 million in tax losses when it was acquired. The effect may be significant on the bottom line of Amcor“s US operations and the group as a whole on the next five years. According to one analyst, the effective tax rate of the group is likely to fall to 26 %, delivering a net benefit of AUD 19 million to annual profit. The tax losses are expected to reduce the effective tax rate to approximately 26% for at the least the next five years It is understood the company is currently not paying any tax in the United States and does not anticipate doing so for the next four years.” With a global market share of about 12 % the company is generating about AUD 2 billion in sales a year from the PET operation. While managing director Russel Jones appears to have convinced the market that most of Amcor“s core businesses are meeting performance targets, the one uncertainty is the California-based packaging distribution and corrugated box subsidiary, Amcor Sunclipse. Future earnings of the subsidiary are likely to be hit by the slowdown in the US economy and the appreciation of the Australian dollar against the US currency. While Sunclipse posted a slight increase in sales during the first half, the depreciation of the US currency meant the subsidiary“s pre-tax earnings actually fell by 1% to AUD 704 million. The decline of the US currency in the first reduced the Sunclipse contribution by about AUD 4.2million. At the announcement of the interim profit, Jones accepted that trading conditions in the June half would continue to be difficult, in spite of the Bush administration“s efforts to stimulate the US economy. Amcor“s Asian operations are also anticipated to pull down annual earnings slightly after suffering a decline in sales in the first half.

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