2023-08-23 23:58:41 ET
Summary
- Ardagh Metal Packaging manufactures metal cans for beverage producers.
- The company's stock has seen a large decrease in price since going public in 2021, as the company's operating margin has fell from its historical level.
- Ardagh's financials have shown growth as the company has had heavy investments, but as investments slow down the company should see a more static future.
- The current stock level seems to price the stock near my DCF model's estimated fair value, constituting a hold-rating.
Ardagh Metal Packaging ( AMBP ) manufactures metal cans to beverage producers. Although the company’s operations are very low risk in their nature, the company’s investors are posed with risks as AMBP has an extensively leveraged balance sheet. With the current price of the stock seeming to price the risks fairly according to my DCF model estimates, I have a hold-rating for the stock.
The Company
Boringly enough, Ardagh manufactures and sells metal cans to beverage producers. The company produces cans for the European, the United States, and Brazil markets. Ardagh’s history starts in 2016 according to the company’s website , when Ardagh Group bought 22 facilities from Ball Corporation, which were spread across the previously mentioned geographical areas. After the acquisition, Ardagh has further expanded with an acquisition in Ohio and further facility constructions.
Ardagh went public in 2021 through a SPAC. The stock has seen a slow and steady decrease in price after the merger, as the stock market saw a selloff and as Ardagh’s operating profit started to decrease from the 2021 level. At the time of writing the stock stands at $3.43, around 66% below the initial nominal value of the SPAC:
Financials
Ardagh achieved revenues of $4689 million in 2022, translating to a growth of 15.6% from the previous year as the company’s number of facilities grew. Prior to 2022, the company achieved a growth of 17.5% in 2021, and only a small nominal growth in years prior to 2021:
Ardagh's Revenues (Seeking Alpha)
As the current economic situation is challenging, Ardagh has had slightly decreasing revenues in the latest three quarters. In their most recent quarter, the company’s revenues decreased by 3.7% - the company’s CEO Oliver Graham attributed the decrease mostly to Brazil’s poor performance in the company’s Q2 earnings call :
“We experienced a challenging quarter against a global backdrop of sustained inflationary and household financial pressures, which was impacting on consumer demand. While we recorded global shipments growth of 5%, which included strong growth of 18% in North America and a solid 2% growth in Europe, we faced difficult conditions in the Brazil market where shipments declined by a double-digit percentage relative to a strong prior year comparative impacting profitability.”
Later in the call, Graham did mention that promotional activity has started to improve modestly; Ardagh’s decreasing revenues could see a stop in the near future.
I believe Ardagh’s long-term growth should be moderate, if the company does not acquire further facilities – the company’s 2021 and 2022 growth rates were boosted by extensive investments – in 2021 and 2022 the company’s capital expenditures were $679 million and $585 million respectively, clearly above previous levels of below $300 million.
Ardagh’s operating margin has been in higher single-number digits historically, with the currently challenging economic climate lowering the company’s trailing operating margin to 4.0% as the facilities’ utilization worsens. I believe the company’s operating margin should eventually jump back to historical figures – for most of the company’s financial history, the EBIT margin has been between six and seven percent, which should be reasonable to expect from the company in upcoming years.
Although the company’s operations are otherwise quite stable, the company is somewhat risky as the company holds long-term debts totalling $3359 million , compared to the company’s market capitalization of $2050 million. Further, with the rising interest rates the company’s operating profits are partly eaten away by interest expenses – in the last twelve months, Ardagh has had interest expenses of $131 million and an EBIT of $186 million. Of the long-term debt, $140 million is in the current portion.
The company’s debt amount has increased in the recent history as Ardagh has had extensive capital expenditures. I do believe, though, that the company should be able to start to pay off debts as the market condition normalizes and Ardagh has smaller needs for capital expenditures; although a risky prospect, the debt should not break Ardagh’s investment case completely in my opinion.
Valuation
Ardagh’s NTM EV/EBIT ratio has been between 15 and 20 for most of its history, with the most recent figure touching the upper figure at 19.88:
To further analyse the company’s valuation, I constructed a discounted cash flow model. In the model, I estimate Ardagh to achieve very modest growth – an increase of 1% for 2023, and a growth of 4.5% for 2024 as the market conditions normalize. Going forward, I estimate the company’s growth to slowly hinder into a growth rate of two percent. As the growth is modest, I don’t expect the company to have extensive investments; the company’s cash flow conversion should be at a good level.
As for the EBIT margin, I expect Ardagh to have an EBIT of $235 million in 2023, translating to a margin of 4.96%, below the company’s previous year and historical figures. In the upcoming years, though, I expect the company to achieve margins above six percent, representing the company’s historical levels. These expectations along with a cost of capital of 6.94% craft the following DCF model scenario, with a fair value estimate of $3.18, seven percent below the current price of $3.43:
The used cost of capital is derived from a capital asset pricing model:
CAPM of Ardagh (Author's Calculation)
In Q2 of 2023, Ardagh had $49 million in interest expenses. Annualized, this makes the company’s interest rate 5.84% with the company’s current amount of interest-bearing debt. I expect the company to have a leveraged balance sheet for a long period of time and estimate the company’s long-term debt-to-equity ratio to be 40%.
On the cost of equity side, I use the United States’ 10-year bond yield as the risk-free rate, with the yield being 4.28% at the time of writing. The estimate of 5.91% for the equity risk premium is Professor Aswath Damodaran’s estimate for the United States made in July. The used beta of 0.67 is an estimate taken from Tikr . Finally, I add a small liquidity premium of 0.4% into the cost of equity, crafting a low cost of equity of 8.64% and a WACC of 6.94%, used in the DCF model.
Takeaway
As the macroeconomic situation elevates from the currently challenging state, I believe Ardagh’s earnings level should rise considerably. With the large amount of interest-bearing debt and a slowing growth, though, I believe the rising operating margin is priced into the stock’s current price. If the company performs at the level of my assumptions, I believe the company is currently priced fairly, constituting a hold-rating for the stock.
For further details see:
Ardagh Metal Packaging: Debt Levels Pose A Risk