Pact Group Holdings Limited

Company Overview: Incorporated in 2010, Pact Group Holdings Limited (ASX: PGH), provides specialty packaging solutions and caters consumer and industrial sectors. It focuses on New Zealand and Australia in Packaging and Sustainability, Materials Handling and Pooling, and Contract Manufacturing Services. PGH was listed on ASX in 2013.

PGH Details

Organic Growth in Volumes and Segmented Fragmentation: The company has been working through three segments, Packaging & Sustainability being ~64%, Materials Handling and Pooling being ~20% and Contract Manufacturing Services being ~18%, contributors to the total revenue, respectively, in FY21.

FY21 at Glance:

The company reported resilient performance during the year, owing to prudent cost measures.

• Revenue: Majorly owing to the downside in Contract Manufacturing hygiene category volumes, the group revenue was down by ~2.6% and was reported as $1,761.6 million in FY21 vs $1,809.2 million in FY20.
• NPAT: The group’s product mix, organic growth in volumes, efficient delivery of programs and effective management of raw material input costs movements lead its underlying NPAT hike by ~28% to ~$94 million.
• Balance Sheet: With the help of increased earnings, strong operating cash flow performance, and China's property disposal proceeds, the company closed its balance sheet with a ~4.6% Y-o-Y reduction in Net Debt. The cash balance at the end of 30^th June 2021 stood as ~$62.15 million versus ~$76.00 million as of 30^th June 2020.

Segments’ Focus:

• Packaging & Sustainability/Materials Handling and Pooling Segments: Despite the supply chain disruptions due to raw material shortages and pallet availability, the volumes in this segment have been aligned as per the expectations. Which therefore might need more working capital, to fulfil the supply. On the other hand, higher raw materials and international freight costs have been offset by the strict margin management activities, giving a cushion to its earnings in 1HFY22. The segment reported $1,131.1 million of revenue in FY21 and were the main contributor towards revenue.
• Contract Manufacturing Segment: In October 2021, the company decided to cease the sale process of the segment. Due to the lockdown in Victoria and New South Wales and higher input costs, the segment’s performance got impacted. For 1HFY22, its Underlying EBIT is expected to come to breakeven with the margins still be compromised due to higher costs.

Segment Fragmentation (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 62.97% of the total shareholding, while the top 2 constitute the maximum holding. Geminder (Raphael) and Investors Mutual Limited are holding a maximum stake in the company at 46.76% and 6.54%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company has reported an improvement in net margin performance from negative 15.8% in FY19 to +5% in FY21. It also reduced its debt in FY21 from ~$1,144 million to ~$1,117 million.

Debt Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• COVID-19 Risks: The Group is prone to the impacts of the COVID-19 pandemic, which might affect its operations, employees and further factors.
• Supply Chain Disruptions: The company is susceptible to the supply chains disruptions caused by lockdowns, which might be affecting the fulfilment of sufficing the clients’ demands.
• Changes In Tastes & Preferences: The demand for its products might get impacted by changes in consumer & client preferences.
• Demand & Supply Gap: Complimentary to the above-mentioned factors, the group might be unable to fulfil the demands of the clients, therefore affecting its volume of sales.
• Foreign Currency Risk: The company is also exposed to fluctuations in foreign currency, which might have an impact on the profitability too.

Outlook: After excluding the Contract Manufacturing Segment, the company expects its underlying EBIT to be ~$80 million in H1FY22, which is ~$5 million lesser than prior year. For its 2HFY22, the company expects the underlying demand to continue, while the supply chain disruptions will persist for near term. The group will release more information on earnings to be released in the awaited half-yearly results for FY22 in February 2022.

It is expected that margins in Australian packaging industry will rise to ~10.0% in FY25, which has been ~6.5% in FY21 due to high costs and supply chain constraints. Looking forward, PGH’s focus is on the following key areas:

• Strengthen its growth in reuse volumes in the USA and new contracts in Europe.
• Continue work on aligning margin management and contribute to the Australian packaging industry.
• Grow in Asia’s Packaging Platform.
• After the cessation of sales proceeds of Contract Manufacturing segment, PGH has appointed new management to focus on near term headwinds and improve its performance.

The Group Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of PGH is trading below its 52-weeks’ average levels of $2.27-$4.63. The stock of PGH gave a negative return of ~31.90% in the past nine months and a negative return of ~27.63% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ average multiple, considering the expected supply chain disruption in the near term, shrink of margins due to higher costs in Contract Manufacturing Segment and its lower volume (hygiene category). For the purpose of valuation, few peers like Amcor PLC (ASX: AMC), Orora Ltd (ASX: ORA), Pro-Pac Packaging Ltd (ASX: PPGDA) have been considered. Considering the expected upside in valuation, margin management strategy, current trading levels, improvement in underlying NPAT performance, lower net debt, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.50, ~10:30 AM (GMT+10), Sydney, Eastern Australia, as on 18^th January 2022.

PGH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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