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Pact turnaround on track, says Morningstar

Lex Hall  |  21 Aug 2020Text size  Decrease  Increase  |  
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Sanjay Dayal’s plans to make the company the domestic leader in plastics packaging is advancing, says Grant Slade.

Volumes in narrow moat Pact Group’s core Australian packaging segment declined again in the second half of fiscal 2020.

Drought and bushfires affected packaging demand from fresh food and dairy industries, while industrial demand was impacted by reduced business activity due to covid restrictions during the half year ending in June 2020.

Pact Group (ASX: PGH) chief executive Sanjay Dayal said, “I am very pleased with our financial performance in FY20. We have delivered improved earnings and margins and have strengthened our balance sheet.

“These results, delivered in a period where we faced the uncertainty of covid-19, and the challenges of other macro events, illustrates the resilience of our portfolio, and our discipline in managing cash and protecting our balance sheet.”

Pact Group is the largest rigid plastic packaging manufacturer in Australia and New Zealand and has a growing footprint in Asia following the acquisition of the CSI and Graham Packaging businesses in early 2018.

Following some 50 acquisitions, Pact has emerged with a leading market share of the Australian rigids market, estimated at 35 per cent. 

Pact Group (PGH) - 1YR

Pact Group -1YR

Source: Morningstar Premium

Despite the challenging operating environment, Pact is starting to show progress in Dayal’s turnaround effort according to Morningstar equity analyst Grant Slade.

 The company is six months into an eighteen-month program, which aims to position Pact as a domestic leader in the circular plastics economy of the future.

“Good progress was made on the repair of the balance sheet—Pact’s biggest near-term imperative. With the divestment of the contract manufacturing business back on the cards, greater improvement in balance sheet metrics is likely near-term,” Slade says.

“Pact also made progress toward advancing its long-term strategic agenda. We are optimistic about Dayal’s strategy, which aims to position Pact as a domestic leader in the circular plastics economy of the future.”

Another positive cited by Slade is continued improvement in Pact’s beleaguered balance sheet as leverage fell to 2.6 times net debt / EBITDA from three times a year earlier.

The primary driver of this improvement was a lack of 2020 acquisitions and a suspension of the dividend in late 2019 and the first half of 2020. With the divestment of the contract manufacturing business back on the cards, greater improvement in balance sheet metrics is likely near-term.

Slade is “optimistic about Dayal’s strategy, which aims to position Pact as a domestic leader in the circular plastics economy of the future”.

Slade maintained his $3.60 fair value and the shares are currently trading at an approximate 33 per cent discount to fair value.

This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

is content editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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