|Shares Out. (in M):||136||P/E||14.0x||12.4x|
|Market Cap (in $M):||6,000||P/FCF||11.7x||10.6x|
|Net Debt (in $M):||3,170||EBIT||954||1,000|
Crown Holdings is a worldwide leader in food and beverage packaging, mainly cans (global #1 in food, #3 in beverages).
The company has specialised in packaging since 1892 and invented the crown cork
The concentrated industry structure and defensive nature of the product have limited the downside of the stock in market
corrections, while the decent growth has allowed the stock to more or less keep up with rising global markets. This combination
has led to substantial outperformance for Crown through the cycle, and I expect this trend to continue going forward.
in line with GDP.
middle class consuming more food and beverages, and 2) cans gaining market share as packaging material versus glass, paper and
plastic. The latter allows for more sustainable EM growth compared to the Unilievers of this world and the opportunity going forward
remains substantial. Cans currently have a market share of <5% in China, compared to 50% in the US. Even Brazil has grown to
around 40% now, so it’s probably not a stretch to believe that the Chinese can market will double over the coming years to 10%
market share. The popularity of cans as a packaging material worldwide is driven by the fact that they are the easiest to handle (transport,
stack, refrigerate), offer the best preserve qualities (long shelf-life, air and light tight, and therefore no preservatives necessary),
are the cheapest to produce, and offer the best environmental credentials.
ability to rapidly expand capacity thanks to the in-house manufacturing of equipment, have all contributed to Crown having the
largest EM exposure amongst developed food & beverage packaging companies and therefore the largest growth rate. Competitors
are also ramping up capacity in EM, but Crown continues to take market share, helped by the fact that it is the lowest cost producer in
most countries. Over the past 3 years, Crown’s market share has grown from 17% to 27% in China and from 19% to 26% in Brazil.
in ’10 and $3bn expected in ’13. In Q3, Asia Pacific volumes were up 19% yoy, Brazil +10%, Colombia +7.5% and Mexico +6.5%.
Attractive industry structure / company positioning
have a 79% market share in Europe, while the top 4 have a 91% market share in the US. Crown is the global market and price leader in
food cans and the #3 in beverage cans (#1 in Asia & the Middle East).
can shipments declined 3.7% between ’07 and ’10, the industry reduced its capacity by 7.4% allowing for stable operating margins.
Similarly, the US food can market has seen a gradual 1% per year decline in volumes without this leading to price competition and margin
pressure. The defensive nature of Crown’s end product adds an additional layer of stability.
close to the client (Crown has 149 plants across 41 countries). It is also more technologically advanced than one would think, with substantial
R&D going into innovative design and the reduction of raw material consumption.
for faster capacity expansion in growth markets), and the fact that it is the low cost producer in most of its end markets, including the
FCF expansion, capital returns
will be suspended for 18-24 months to fund the Mivisa acquisition (see further down). But given that the acquisition should be up to 20%
earnings and cash flow accretive, it would be worth giving up 10% capital returns.
been lower in recent years on the back of 1) a rapid capacity expansion program in emerging markets, 2) restructuring efforts in developed
markets, and 3) some exceptional costs related to the Thai floods. With most of the above behind us and a renewed focus on working capital,
FCF generation is expected to grow to $500mn in ’13 and $580mn in ’15 (10% FCF yield). The projected increase in FCF is easing market
worries about the balance sheet and pension funding, and increases investor confidence in the guidance for $300mn annual share buybacks
a year longer-term.
the sector for years. So I struggle to model numbers substantially ahead of current consensus expectations.
of the product have limited the downside of the stock in market corrections, while the decent growth has allowed the stock to more or
less keep up with rising global markets. This combination has led to substantial outperformance for Crown through the cycle, and I
expect this trend to continue going forward. Crown declined 19% in the ’08-’09 correction (MSCI World -59%), has rising 106% since
Mar ’09 (MSCI World +124%), which adds up to a 71% performance since Nov ’07 (MSCI World -7%) and 440% since the IPO in ’03
(MSCI World +97%).
the back of temporary European food / EM weakness have led to underperformance in the stock in recent months. With the FY1 P/E
ratio falling to 11.5x as we move into ’14, at the lower end of the historical trading range and the peer group, we are approaching a
level where I see 30-50% upside, while downside should be limited to 10-20%.
its ability to grow in EM on the back of can penetration even if consumption slows down.
Management are good stewards of shareholder funds
of this and the CFROI track record is very stable. The CEO owns $60mn worth of shares.
recycled, and therefore cans are an environmentally friendly packaging alternative to plastic/paper/glass. Aluminium is 100% recyclable
and 75% of the aluminium used over the past 150 years is still in use today.
Mivisa Envases Acquisition
written before the announcement, which is why I write about it separately).
and €133mn in EBITDA over the fiscal year ending in June, implying a price of 9x EBITDA excluding synergies and 7.5x including synergies.
That is a fair price compared to Crown’s EV/EBITDA of 8.3x, and taking into account that Mivisa generates an OP margin that is more than
double the OP margin of Crown in European Food, and twice Crown’s overall OP margin. The acquisition takes Crown’s market share in
European food cans to 40-45%.
source of disappointment in recent years, and 2) the deal could be 20% accretive on a FCF basis (see calculations below, depending on full
bring the net-debt / EBITDA ratio back to current levels in 2 years. Netting it all out, you give up 10% growth from buybacks in return for
roughly 20% growth from the acquisition.
earnings accretion of $0.58 and putting the FY1 multiple of 12.3x on it implies that the deal should add $7 in value, excluding additional
synergies or a turnaround in Crown’s European food business on the back of the deal. So there is still some upside from the deal on the table.
|Crown FY14E||Mivisa FY6/13||Synergies||Pro Forma||Accretion||Accretion %|
|D&A as % of Sales||-1.6%||-4.6%||-1.9%|
|Normalised Net Income||463||102||-22||543||80||17.4%|
|Change in WC||-5|
|Other OP CF||117|
|Net-Debt / EBITDA||2.8||3.6|
|Using 2 years of FCF to||lower debt|
|Net-Debt / EBITDA||2.8|
The calculations above are speculative because we don't know yet if the European Union will allow Crown to keep all plants, and the
company has not profived details on things like D&A. I've built in some conservatism by using historical Mivisa numbers instead of
forward looking, by setting a high D&A number, and there should be upside to synergy targets.
End of the earnings downgrades
packager. The 11/12 decline in earnings estimates was largely driven by the falling Euro, and to a lesser extent weakness in the European
food market. The more recent decline has been driven by a combination of ongoing weakness in European food, margin pressure in Asia,
and the decision to lower Q4 production in order to flush out excess inventory. I discuss all of these factors in more detail below.
- Crown lowered its Q3 guidance from $1.15-1.25 to $1.05-1.10 at the end of September, quoting weakness in European
food and to a lesser extent margin pressure in SE Asia.
- Actual earnings came in at $1.13 (excluding restructuring charges), or 13% yoy growth. Sales were up 4% on strong
beverage can demand globally and a 1% FX tailwind, partially offset by the pass-through of lower raw material costs. EBIT grew 8%
on lower depreciation expenses, and EPS grew 13% after share buybacks.
- European Food was indeed the weak spot (sales -0.7% yoy, OP -1.6%), with general economic weakness leading to
both lower volume growth and a mix shift from larger to less profitable smaller cans. Additionally, there was an element of
weather-related harvest delays.
- SE Asia margins of 10.7% versus 14.6% last year were the other disappointment. Management breaks down the 400bp
drop as 1) a 200bp headwind from new plants coming on-line (start-up costs, lower utilisation rates), 100bp from acquiring the
lower margin Vietnamese beverage can producer Superior Multi-Packaging, and 100bp from volume disruptions in Cambodia on
the back of social unrest following the elections.
- Crown guided for a $0.46-0.51 EPS in Q4, versus consensus expectations of $0.57. The lower EPS is driven by a temporary
production cut to flush out some excess inventory (mainly European food) in order to maximise cash flows and hit the $500mn FY
- I’ve questioned a number of sell-side analysts on the Q4 production cut and they all seem very relaxed about this.
Management has a track record of focusing on cash flow generation rather than earnings and has done this before. Also, inventories
aren’t high at the moment, so the production cut should be limited to Q4.
- The acquisition of Mivisa is a game changer for European Food, and could turn the business from a serial disappointer into
a source of earnings surprises on the back of better synergies.
- Expectations for European beverages and the Americas businesses seem reasonable compared to current trends.
- Which leaves the SE Asian business as my only real worry. Some analysts assume a 4% rebound in margins within 2 years,
while I model 2%. I accept the strong position of Crown in non-China part of South-East Asia (good growth, consolidated market,
Crown is market leader) and I can see margins recover as the new plants fill up and the peace returns in Cambodia. But I am less
positive on the Chinese business (50% of SE Asia), which is more scattered (including government-run competition), with growth
slowing down as new competitive capacity is coming on-line. So I expect that some of the recent 4% margin loss will be more
permanent. The good news is that the ’14 consensus expectations seem reasonable, it’s ’15 and beyond that I’m worried about.
- It will probably take around 6 months to get regulatory approval for the Mivisa deal, so we might see some further disappointing
European food numbers in the meantime. But absent further economic/FX weakness, I believe we have seen the worst in terms of
earnings downgrades. And once the deal comes through, downgrades should turn into upgrades.
China has some small competitors and government enterprises.
and kept its OP margin at 14%. But total sales growth was still 14% in ’12, so it hardly qualifies as a very challenging year.
in order to fulfil the contract. As a result, the US food can market will have 4% overcapacity.
contracts, it might lead to some disruption in the industry. Silgan has the biggest contract up for renewal next year.
Consolidated client base
the risk of big contract losses and the potential for margin pressure.
manageable. Contract losses have never been disruptive before for Crown, and margins have been very stable over time. Although
you can see the impact of the client base when comparing the margins of the more concentrated beverage business (13.9% in the
Americas, 14.5% in Europe) with North American Food (17%).
not the most conservative, but it is manageable given the stability of the business and decent FCF generation, and a big improvement
from the 6x ratio in 2001.
deficit (see below) and $2bn of goodwill on the balance sheet. The increase in FCF generation over the coming years should allow the
company to take down debt, close the pension deficit and still leave room for capital returns.
in ’11 when the company lowered the expected rate of return. And management is guiding for contributions of $85mn, $85mn,
$134mn, $120mn and $145mn over the coming 5 years.
to the expected return / discount rate would change the ’13 expense by $11mn / $4mn.
given the reduced leverage, the stability of the business and the projected FCF generation.
time Europe’s economic and sovereign debt worries hit the headlines.
much smaller. This lowers the demand for cans, as does food inflation which can be triggered by smaller harvests.
prices can lead to short-term volatility in margins. However, the concentrated industry structure has allowed Crown to pass on
price increase historically. And similar to what we see with tobacco companies, Crown has used any historical price increase to slightly expand margins.
the past decade in food to (re-sealable) plastics. However, the crucial word here is gradual, there have been no disruptive shifts.
refrigerate), offer the best preserve qualities (long shelf-life, air and light tight, and therefore no preservatives necessary), are the
cheapest to produce, and offers the best environmental credentials.
Crown is trading on 13.1x consensus '13 EPS, 11.5x '14
and cheap versus most consumer staples.
history of trading in-line.
The Mivisa acquisition should allow for around 10% upside on the numbers mentioned below (20% accretion, -10% from
the share buyback suspension)
end of the historical range) gives a target price of $36 (16% downside)
gives a target price of $31 (28% downside).
gets me to a TP of $53 (23% upside).
higher synergies leads to a TP of $68 (58% upside)
|Crown FY15E||Mivisa FY6/13||Synergies||Pro Forma|
|Crown FY15E||Mivisa FY6/13||Synergies||Pro Forma|
Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
Data is for illustrative purposes only. This information does not constitute an offer, solicitation or recommendation for the purchase
or sale of securities or other financial instruments, nor does the information constitute advice or an expression of my view as to
whether a particular security or financial instrument is appropriate.
I, my employer and/or others we advise hold a material investment in the issuer's securities.