Why I Dubbed Ardagh Metal Packaging (NYSE:AMBP)

Introduction

It has now been almost three months since I explained my investment thesis for Ardagh Metal Packaging (New York Stock Exchange: AMBP). Unfortunately, the stock price has lost another 20% since this article due to general market circumstances and the dragged AMBP ashore with the competitors Ball (BALL) and Crown Assets (CCK), although the underlying performance of all companies remains strong.

In this article, I’ll explain why I’ve added to my stance and why I’m still positive about the long-term outlook now more than ever.

Yes, Q1 was quite light

In the first quarter of 2022, Ardagh was able to increase revenue by more than 20% to $1.14 billion, but despite this increase in revenue, gross profit declined, showing a sharp decline in margins. The operating profit was $41 millionbut that included about $18 million of one-time items and, on a normalized basis, the operating profit decline was limited to just $5 million.

Reported net income was $57 million, but underlying net income was only $22 million as some exceptional items contributed to finance income. Underlying net income of $22 million represents EPS of just $0.035, so I fully understand why some disappointed shareholders have thrown in the towel. But there is more than meets the eye here.

First, Ardagh is a story of growth. Some negative exceptional items relate to start-up expenses for new plants. But more importantly, Ardagh is about cash flow. Building a new factory is not cheap, but the maintenance expenses required to keep these factories running are significantly less than the depreciation expenses. These amortization allowances weigh on net income but have no impact on cash flow.

And I think that caused another problem. The cash flow statement in press release only had negative operating cash flow of $194 million. I’m sure this has worried some investors, but it’s extremely important to understand where this number comes from.

Investors should therefore always consult the detailed financial statements rather than simply consulting the abbreviated version of the press releases. As you can see below, the negative operating cash flow of $194 million was caused by an investment of $325 million in working capital and $14 million in start-up costs. new factories.

This means adjusted operating cash flow was not negative $194 million, but positive $145 million. It’s quite a difference. I will also deduct $15M in lease payments and debt issuance costs (see below) to arrive at operating cash flow of $130M before changes in working capital and non-current items. recurring.

But with a total capex of $117 million, free cash flow was only $13 million. And that’s worse than the underlying net income.

I would like to go back once again to the company’s growth plans. Sustaining capital expenditures for FY2024 are estimated at $117 million, but this already includes sustaining capital expenditures for new plants that are still under construction. This means current sustaining investments will likely be closer to $100 million per year, but just to be on the safe side, I’ll use $120 million per year. The company mentioned a maintenance investment of $20 million in the first quarter during its conference call. I’m pretty conservative here. This means that of the $117 million capital bill in the first quarter, only $30 million would support capital spending. That means the underlying sustaining free cash flow was about $100 million, or about $0.16 per share. On an annualized basis, sustaining free cash flow would be around $0.64 to $0.65 based on Q1 results, but we should see two new mills start contributing in the coming quarters.

I recommend everyone read the transcript of the conference call

I think Ardagh Metal Packaging has only one major problem: communication with shareholders. There are hardly any interim press releases, the company has not even bothered to issue a press release to announce its first dividend, while it also lacks investor resources. There is no real company presentation on the site. Sure, there’s a “recent” presentation released at the company’s presentation at the Credit Suisse Industrials conference, but it’s only a 10-page document with a title page, a disclaimer and a blank last page. This means that this presentation only contains seven slides containing information. Information that is already outdated by now, since we are almost six months later now.

So forget about finding a lot of useful information on the company’s website or in its documentation. Its quarterly conference calls are actually the most interesting IR-related issues because they provide a lot of background information. I would like to highlight a few excerpts from the Q1 conference call. The emphasis is always mine.

To recap some of the biggest growth investment projects, all of which are backed by multi-year customer agreements, in North America, the first of our 2 high-speed lines in Winston Salem, North Carolina started production in the first quarter, and the second line is now also in production.

In Huron, Ohio, the first of the new can lines will start production shortly followed by a second line around the middle of the year, with additional capacity to be added later in the year.

This means that there are three production lines that are operational or about to be operational and which have not been included in the first quarter results.

In Europe, new capacity in the UK started production this quarter, as well as in Germany, as part of an expansion project that will also see new capacity addition in the first half of 2023, while our new facility in Northern Ireland progresses with planning.

The second quarter will therefore be the first full quarterly contribution from the UK installation. At the same time, AMBP is investing in Germany where another production line should be operational in H1 2023. This should further accelerate EBITDA and cash flows.

In terms of orientation for the second quarter, adjusted EBITDA should be around $180 million year-over-year of $168 million in constant currency.

This is important because it confirms my previous comments about the new ability that will be gradually coming online over the course of the year. AMBP forecasts adjusted EBITDA for the second quarter of $180 million, while adjusted EBITDA for the first quarter was only $145 million. This means that the company is essentially targeting a 25% increase in EBITDA QoQ. For the full year, Ardagh is now targeting EBITDA of $750 million. If we deduct the $325 million in first half EBITDA ($145 million in the first quarter + $180 million in the second quarter), the second half EBITDA would have to be approximately $425 million to respect these forecasts. It could be tight, but the fact that the company has confirmed its full year EBITDA guidance means we can certainly expect further acceleration in EBITDA throughout the year. The first quarter will probably have been the weakest quarter on all fronts (revenue, EBITDA and maintenance of free cash flow).

Investment thesis

I think there are two main reasons for the company’s underperformance. As AMBP has been listed through a SPAC, there may be uncontrolled sales after certain blockages expire. This could weigh on the results. Unfortunately, there doesn’t appear to be any valid plan on the part of the company to increase investor awareness, which could help absorb any stock that’s sold in the market.

Even though having a better communication strategy won’t solve everything, I think it’s something the company needs to work on. Additionally, it may need to rethink its capital allocation strategies as Ardagh’s plans to issue preferred shares to fund the expansion program have been quite pushed back, while it has also announced a program dividends (very generous). If the company does pay a dividend of $0.65 this year, the current dividend yield is about 11%. Personally, I think it’s totally unnecessary, and maintaining a quarterly dividend at $0.10 without paying a final dividend of $0.35 would save the company $150 million in cash outflows per year. This money could then be used to further fund the expansion program while reducing the need to find capital elsewhere.

Ardagh Metal Packaging is not a perfect stock. But at current levels, it’s just too cheap to ignore, and I’ve added to my position. Right now, Ardagh is my largest position in my portfolio, as I expect the company to generate $450 million in free cash flow this year. This makes the current market capitalization of $3.6 billion rather cheap.