2023-04-15 11:35:00 ET
Summary
- Crown Holdings is one of the largest producers of aluminum beverage cans in the world.
- 2023 will be the last year of growth investments. From 2024 onwards, capex will decrease to the D&A level.
- This will allow the underlying free cash flow to become very visible.
- Crown Holdings is too cheap as it is trading at just 7.5 times my anticipated 2024 EBITDA and at a double-digit sustaining FCF yield.
Introduction
Crown Holdings ( CCK ) is a large producer of aluminum beverage cans. The entire sector has been hit hard as the production capacity expansion wasn't absorbed as fast as anticipated. The growth investments should now be completed and this year will be the last year where Crown Holdings has to spend a substantial amount of cash on its growth initiatives. The company has guided for a 45% capex reduction in 2024 and that will allow the market to realize Crown Holdings is a cash cow in disguise.
2022 was okay, 2023 will be much better
Crown Holdings reported a total revenue of just under $13B in 2022 and as the company was unable to pass through all cost increases to its customers, the operating income decreased by about 2% to $1.34B. This is mainly due to a 18% increase in the COGS as most of the other expenses remained pretty stable or even slightly decreased again.
While the interest expenses increased again, Crown's pre-tax income result of $1.06B and net income of $855M was pretty decent. You can't really compare it to the $411M net loss recorded in 2021 as the company recorded a $1.52B non-recurring charge but it compares quite well to the $688M in reported net income in 2020.
After deducting the $128M of net income attributable to non-controlling interests, the net income attributable to Crown's own shareholders was $727M which equates an EPS of $6.01.
As Crown could be seen as an 'industrial' player with relatively low sustaining capex (this does not mean the sustaining capex is minimal, but it does mean that once a new plant has been built, this sunk cost will be depreciated while the ongoing maintenance capital expenditures are substantially lower than the depreciation expenses), I think the cash flow result of Crown is at least equally and perhaps even more important than the income statement.
The reported operating cash flow in 2022 was approximately $803M. This includes a net capex investment of approximately $570M but it also excludes the $100M in cash payments to non-controlling shareholders. This means the underlying operating cash flow was approximately $1.27B.
The total capex was just $839M resulting in a net free cash flow of $430M which is roughly $3.5/share.
Keep in mind the reported capex is still almost 100% higher than the depreciation and amortization expenses and the total capex should start to drop this year as most of the growth investments have now been completed. On the FY 2022 conference call, Crown's management commented the total capex will drop to just around $500M from 2024 on. While that is still slightly higher than the current depreciation expenses it will allow 'the market' to see a much higher reported free cash flow result.
This means that if I would use a total capex of $500M going forward (I anticipate this to be around $400M in sustaining capex and $100M in miscellaneous growth and improvement initiatives), the underlying free cash flow result of Crown Holdings would be around $770M in 2022. That's in excess of $6/share.
But there's more.
In 2023, Crown Holdings expects its sales volumes to increase by a mid-single digit percentage and this, in combination with higher prices, should result in a substantial revenue increase and a 8-12% EBITDA increase.
That would be pretty impressive. The adjusted EBITDA in 2022 came in at $1.74B and a 10% increase (the midpoint of the guidance range) would peg the anticipated 2023 EBITDA at $1.9B. The company also mentioned it expects a free cash flow result of $500M after taking $900M in capex into consideration this year. This also means the net free cash flow result will increase towards $900M in 2024 when the total capex level decreases further from $900M to $500M. So even in my most conservative scenario and after taking the impact of non-controlling interests into account, I still anticipate a net free cash flow result of $6.50 per share in 2024 (excluding changes in the working capital position). This includes smaller growth investments and I estimate the underlying sustaining free cash flow to be closer to $7.5/share using the current share count of 120M shares outstanding.
Investment thesis
Surprisingly, Crown Holdings is catching up to Ball Corporation (BALL). The revenue of both companies is quite comparable and Crown's EBITDA in 2022 came pretty close to Ball's adjusted EBITDA. As of the end of 2022, Crown had about $550M in cash and $7B in net debt resulting in a total enterprise value of approximately $16B for an EV/EBITDA multiple of just around 8.5. As we can expect Crown Holdings to further reduce its net debt towards $6B by the end of 2024 while the EBITDA should increase to in excess of $2B, I now anticipate Crown Holdings to trade at an EBITDA multiple of just 7.5 by the end of next year while the debt ratio should decrease to just under 3.
The combination of all these elements makes Crown Holdings a buy and I will be looking to establish a long position soon. I have written put options on Crown in the past (and due to a liquidity crunch in my portfolio I sold my long position and replaced that with in the money put options) and will likely continue to do so.
For further details see:
Crown Holdings: I'm Bullish And Expect $7.5/Share In FCF From 2024 Onwards