Pact Group Holdings Limited

Company Overview: Pact Group Holdings Limited (ASX: PGH) was incorporated in 2010, is engaged in catering to both consumer and industrial sectors by providing specialty packaging solutions. It has a focus on Packaging and Sustainability, Materials Handling and Pooling, and Contract Manufacturing Services in New Zealand and Australia.

PGH Details

Growth Underpinned by Sustainable Business Model Along with Prudent Cost Approach: The company has been recognised as a leading innovation company for its packaging solutions which also comprises of sustainable Packaging, Reuse, and Recycling solutions.

Look at FY21 Performance:

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

• The group revenue was down by ~2.6% and was reported as $1,761.6 million in FY21 vs $1,809.2 million in the prior year, mainly owing to the downside in Contract Manufacturing hygiene category volumes.
• On the contrary, Packaging and Sustainability segment reported $1,131.1 million in revenue and were the main contributors towards revenue, including $ 8.1 million from the acquisition of Flight Plastics.
• The Net Debt reported was reduced by ~4.6% Y-o-Y, from $613.52 million to $585.0 million which was an outcome of increased earnings, strong operating cash flow performance, and China's property disposal proceeds.
• Despite of market uncertainty and disruption faced, its EBIT Margins were up by 1.2% Y-o-Y, from 9.2% to 10.4%
• The group’s product mix, delivery of efficiency programs and effective management of raw material input costs movements lead to an improvement of 10% pcp basis in its Underlying EBIT.
• Pact acquired Flight Plastics for $23.8 million with an aim to complement its strategy of leading the economy through the use of recycling, reusing and packaging solutions.
• The company seems to be well capitalised, ending the year with $62.15 million of cash reserves as of 30 June 2021, compared to $76.00 million as of 30 June 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Change in Substantial Shareholding:

As per a recent update, Kin Group Pty Ltd and Salvage Pty Ltd  has undergone a change of substantial holding in the company and has increased its voting power to 46.80%, compared to the previous 45.41%.

Top 10 Shareholders: The top 10 shareholders together form around 61.54% of the total shareholding, while the top 4 constitute the maximum holding. Geminder (Raphael) and Investors Mutual Limited are holding a maximum stake in the company at 45.37% 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 gross margin performance from FY19 at 30.6% to 33.5% in FY21. Net margin also improved to 5% in FY21, compared to 4.9% in the prior year.

Liquidity 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 can disrupt the supply chains and also the demand levels for its clients.
• Changes In Consumer Demand: The demand for its products might get impacted by changes in consumer & client preferences.
• Foreign Currency Risk: The company is also exposed to fluctuations in foreign currency, which might have an impact on the profitability too.

Outlook: The company has shown resilience in performance, despite the disruption in the supply chain. It has witnessed volumes to be in line with expectations and has adopted a prudent cost approach to negate higher material and international freight costs. The Group expects Underlying EBIT in H1FY22 to be ~$80 million. It expects to provide a further update on its FY22 earnings estimates during the half-yearly results in February 2022.

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 ~18.20% in the past nine months and a negative return of ~30.62% 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 lower volume in Contract Manufacturing hygiene category, and supply chain disruption in the near term. For the purpose of valuation, few peers like Amcor PLC (ASX: AMC), Orora Ltd (ASX: ORA), Pro-Pac Packaging Ltd (ASX: PPG) have been considered. Considering the expected upside in valuation & current trading levels, improvement in underlying NPAT performance, reduction in net debt, prudent cost approach, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $2.65, (as on 30^th November 2021, up by ~3.515%).

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.

Disclaimer

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