- We did allocate an additional 3% of our partners’ capital to Ardagh Metal Packaging.
- Ardagh Metal Packaging shares have sold off this year.
- The key risk, we think, is Russia turning off natural gas supplies to Europe.
- AMBP stock has the potential to generate 100-200% return in the next three years.
The following segment was excerpted from this fund letter .
Ardagh Metal Packaging ( AMBP )
Ardagh Metal Packaging is another portfolio company that has us salivating. Aluminum can producers like Ardagh Metal Packaging, Ball Corporation ( BALL ), and Crown Holdings ( CCK ) operate in a clubby oligopoly. The top three producers exercise price discipline and their addition to capacity means multi-year take-or-pay contracts which ensure all new build capacity will be absorbed. There are strong environmental, social, and governance ((ESG)) mandates that favor the use of aluminum cans because they can be recycled indefinitely without degrading the cans.
Cans are also more energy efficient than glass bottles and have much higher recycling rates than plastic bottles. Currently, demand exceeds supply, resulting in shortages of aluminum cans in Europe and the U.S. Importing cans is not practical, because empty cans take up a large volume of space, leading to shipping mostly empty air. Hence, cans are often produced and sold locally. Ardagh Metal Packaging shares have sold off this year after investors grew wary of whether the company had the financial means to invest heavily in growth projects and pay a cash dividend.
The completion of a recent green bond offering and preferred investments by the parent company, Ardagh Group, have solved the funding gaps. At quarter-end, Ardagh Metal Packaging was trading at an estimated 6-7 times 2024 stabilized P/FCF multiple, with roughly 4 times net debt/EBITDA ratio. The earliest debt maturity is in 2027 and amounts to less than 1 times the estimated 2027 EBITDA. The company currently pays a 6.5% dividend and has a stock-buyback program in place.
The key risk, we think, is Russia turning off natural gas supplies to Europe. That would cause a severe recession and impact beverage sales. In a true black swan case, we can see European countries rationing natural gas solely for residential heating and shutting off energy/power to manufacturing use. In this severely bearish scenario, Ardagh Metal Packaging might still be able to access power, since beverages are consumer staples and deemed essential.
From an energy-intensity perspective, the process of melting recycled aluminum to make cans is very energy efficient. Energy scarcity may even force European governments to curtail energy-intensive glass-making and increase the demand for cans.
We did allocate an additional 3% of our partners’ capital to Ardagh Metal Packaging which has the potential to generate 100-200% return in the next three years.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Rhizome Partners - Ardagh Metal Packaging: A 100-200% Return Potential