Summary
- Ardagh Metal Packaging is the third largest producer of aluminum beverage cans in the world.
- The company has missed expectations the past few quarters and 2022 was disappointing.
- The dividend is not fully covered, but this will improve in 2023 as restructuring expenses will decrease and the EBITDA will increase.
- Fortunately, the sustaining capex is low and growth investments are now rapidly decreasing, this will boost the reported free cash flow.
Introduction
I like the beverage can industry . I liked Ardagh Metal Packaging (AMBP) when it IPO'ed via a SPAC but ever since that IPO the company has been underdelivering. After initially guiding for a dividend exceeding 60 cents per share per year, AMBP reduced the expectations and the dividend came in at $0.10 per share per quarter. Still respectable, but the company should work on its communication.
2022 was a tough year but I was still slightly optimistic when the company guided for a full-year EBITDA of $640-650M which implied a Q4 EBITDA of $175-185M . Maybe I should have known better, but the company missed its own expectations again.
The company posted a weaker than expected fourth quarter
The company didn't deliver. The adjusted EBITDA came in at $159M which isn't a massive miss, but it once again is one of those frustrating '10% misses'. Not great, but also not so horrible that it makes you want to sell right away.
AMBP Investor Relations
The adjusted net income was just 5 cents per share, and this brought the full-year EBITDA and EPS to respectively $625M and $0.38 per share. As you can see below, the reported net income was $12M, including a negative impact of $4M related to exceptional items on a pre-tax level. The $12M in reported net income represents about $0.02 per share.
But there's one important caveat here. That reported net income does not include the preferred dividends yet! Readers will know I fundamentally disagreed with AMBP's decision to issue 9% yielding preferred shares to its majority shareholder and the impact of that deal is becoming abundantly clear. About 40% (!) of the reported net income in Q4 2022 had to be spent on the preferred dividends (as you can see below). The image below also shows how the adjusted net income came in at $31M after adding back about $25M in amortization expenses.
The full-year net income was $237M on a reported basis, which is just under 40 cents per share.
My initial investment thesis was based on Ardagh's free cash flow profile so rather than looking at the reported or adjusted net income, I'm mainly interested in seeing how much sustaining free cash flow the company generates.
Ardagh reported an operating cash flow of $205M but the starting point in the image above is the 'cash generated from operations' and fortunately there a more detailed breakdown can be found in the footnotes to the financial statements.
The cash generated from operations includes about $202M in working capital changes, but also about $101M in exceptional cash expenses. Excluding the changes in the working capital position, but including the exceptional cash payments, the reported operating cash flow of $205M would have been higher, at about $407M.
We should still deduct the lease payments ($59M) as well as the $11M in preferred dividend payments. The adjusted operating cash flow was $337M. We see the total capex was $596M but keep in mind this still includes a substantial amount of growth capex. The image below, taken from the corporate presentation, implies the sustaining capex was approximately $109M (the difference between $625M in adjusted EBITDA and $516M in 'adjusted EBITDA minus sustaining capex'.
This means the sustaining free cash flow was $337M - $116M = $221M. Divided over 597M shares outstanding, the sustaining free cash flow in 2022 was approximately $0.37 per share.
This means the dividend isn't fully covered at this point
The math and interpretation is pretty simple. If you're generating a sustaining free cash flow of $0.37 per share and paying $0.40 per share in dividends , your dividend is not fully covered.
There are however two mitigating elements here.
First of all, if AMBP would be able to reduce its $100M+ in exceptional and restructuring cash payments, the dividend would be fully covered. Excluding those payments, the underlying sustaining free cash flow would be approximately $0.17 per share higher, and it would come in at $0.54 per share. So that for sure is an element I will be keeping an eye on.
Secondly, the EBITDA outlook for 2023 is encouraging. I'm not sure how reliable the EBITDA guidance is giving the company's previous misses but a 10% EBITDA increase would put the adjusted EBITDA in 2023 at a level that just exceeds the 2021 EBITDA, so it's not unrealistic. That being said, Ardagh is warning it will likely see a weak first semester before the EBITDA picks up again in the second semester . The Q1 EBIDA guidance is just around $130M which would be a 10% decrease compared to Q1 2022.
That $60M in additional EBITDA would almost entirely flow through to the operating cash flow. Let's assume taxes will increase but AMBP can convert $40M of the $63M EBITDA increase into operating cash flow, the sustaining free cash flow would increase by just under $0.07 per share which would also push the underlying sustaining free cash flow above the $0.40 needed to fully cover the current dividend.
Investment thesis
I consider 2023 to be the year of the truth for Ardagh. Growth capex will still exist but decrease to $300M with an additional decrease in 2024 as the entire sector is taking a break from growing to make sure the market can absorb the recent capacity increases.
I don't want to sell at these levels but my patience is wearing thin. Fortunately Ardagh's debt mainly consists of fixed rate debt and there are no maturities before August 2026. Ardagh does have some time to rectify the current situation but my patience is wearing thing. I still believe in aluminum beverage cans and as Ardagh is the third largest player in the world, the company most definitely has a future. But owning the stock has been a more frustrating experience than I had expected.
I have a long position but I am not adding to my position at this time and it no longer is the largest position in my portfolio . Fortunately the quarterly dividend softens the blow but I really want that dividend to be fully covered going forward.
For further details see:
Ardagh Metal Packaging Misses Expectations, Still Offers 8% Yield