Description

Thesis Summary:   (i) only pure play in defensive high FCF industry with baseline long term contracted recurring volume/EBITDA, (ii) cheap absolute (8.6x ’22, 6.8x ’23 Adjusted EBITDA) and relative to its comps (3-4x discount) + pays an attractive current 6.7% dividend + announced large buyback, (iii) best growth prospects as projected to double Adjusted EBITDA to $1.1B by ’24 based on long-term contracted, pre-sold capacity expansion that is both fully funded and approaching completion (with additional material expansion opportunity thereafter), (iv) very smart, highly successful, aligned majority shareholder, (v) supercharged projected equity returns driven by highly accretive capacity expansion (details below) and an optimized capital structure, (vi) large established company, but under the radar company as came public via SPAC

Industry (Summary of Appendix below): 

• Aluminum beverage can packaging very good industry, non-cyclical defensive staple, high FCF, oligopolistic compounders (Ball, Crown, Ardagh, CanPack); industry enjoying major structural change driven by ESG tailwind as aluminum cans (infinitely recyclable) most sustainable substrate (vs. plastic and glass); key statistic:  >75% of all new products are in launched cans up from low 30s% 5 years ago, this all prior to water eventually moving to cans from plastic bottles which would be another incremental material demand driver
• Structural industry changes have led to MSD+ growth in key markets, sold out/short/import dependent conditions and large need for new high ROIC capacity all of which is pre-sold/backed by long term ~5yr purchase agreements with raw material pass-through provisions; importantly, all major players have also permanently taken out select older capacity and have additional plants earmarked if necessary as new more efficient facilities come online

 Company (AMBP): 

• #3 global player behind BALL and CCK; company formed via strong assets opportunistically acquired in 2016 by Ardagh Group out of Ball+Rexam transaction when the US and European antitrust authorities required larger than anticipated divestitures
• Since the acquisition of these assets, Ardagh Group (packaging conglomerate founded/controlled by Paul Coulson, ticker was ARD) operated these assets very well, improving volume, margins and EBITDA; key drivers were (i) post-deal integration, (ii) added some capacity (4B to 38B cans total) via new lines and specialty conversions, (iii) improved mix and diversified from ABI/KO/PEP in US and supported large growers like Mark Anthony Brands (White Claw, Mike’s Hard Lemonade, etc.) and Natl Beverage (La Croix, etc.), (iv) achieved better pricing in contract cycle
• In August of 2021, AMBP was separated out of ARD via a Gores-sponsored SPAC; the deal was done at ~12x Adjusted EBITDA (3-5x discount to BALL and CCK at the time) to create the only pure-play beverage can company with the best growth prospects (BALL has small aerospace and aerosol business and CCK has large transit packaging and some other smaller packaging assets)
• All AMBP plants are fully contracted/sold out in 2022 and 2023 and are >90% contracted through 2024 (% contracted for 2025 and beyond not yet disclosed by management but estimate approaching similar levels), providing a base level of recurring contracted EBITDA
• More importantly, total Adjusted EBITDA is projected to more than double by 2024 (from the 2020 base) driven by large in-process capacity expansions from Stage 1 alone; Stage 2 could add ~35% additional EBITDA to the ’24 base which would be almost triple Adjusted EBITDA from the 2020 base
  • Stage 1:  9 projects are underway, will increase total capacity/volume by 55%, all of which is pre-sold/fully contracted under long term agreements (~5yrs) prior to construction; this stage requires total capital expenditures of $1.8 billion put to work at very attractive economics, the company projects these projects will produce $572M of incremental run rate Adjusted EBITDA (or a 3.1x create); part of reason this capital is so accretive is majority of projects are adding new lines to existing plants (much lower risk/more accretive than new greenfield plants); as of the last earnings report, these projects were all on time/on budget with material capacity starting to come online 2H22 and this stage largely complete by 1H23
  • Stage 2:  at the time of de-SPAC transaction, management had identified an incremental $1.4B of projects that they were working through with their customer base projected to produce a further $400M of Adjusted EBITDA (3.5x create); 2 large projects in this stage have since been announced, one in AZ and one in Ireland (again, all the capacity/volume is pre-sold, fully contracted under long term agreement prior to construction); these projects and the rest of Stage 2 will provide incremental material growth beyond 2024 projection period
• Capital structure:
  • Financing:  all projected necessary capex is already pre-funded via combination of cheap Green Bonds issued at the de-SPAC combined plus a recent add-on secured Green Bond deal; thereafter, future projects self-fund out of FCF; the company has a leverage target of 3.75x-4x forward Adjusted EBITDA, it is currently in this range and is projected to de-lever from here as 2022 is the peak capex year
  • Shareholder returns:  (i) attractive 6.7% common dividend yield underscores the base level of recurring revenue/earnings power inherent in the business, plus (ii) recently authorized $200M buyback; importantly the majority owner has stated that it will not sell shares back to the company, therefore the $200M represents ~22% of the public float
  • Cash taxes:  company is not a material cash taxpayer over the projected period due to tax domicile and accelerated depreciation from the material capital expansion program
  • Parent company:   owns approximately 75% of AMBP; importantly, all of its AMBP stock is held free and clear in unrestricted subsidiary of the parent; other unrelated subsidiaries of the parent hold legacy glass packaging assets of ARD
• Numbers:
  • 2021:  constant FX revs up 15%, Adjusted EBITDA up 19%, driver was volume growth, beat guidance
  • 2022:  guided teens volume growth and Adjusted EBITDA up ~13%; initially guided up ~20% but are two major drivers of the delta:  (i) FX translation due to the move in the Euro YTD and (ii) the timing of contractual cost pass-throughs; as further detailed below, the contracts in this industry provide for full pass through of the major raw material aluminum (concurrent) in addition to pass through of all other material cost inflation (albeit with a lag, length and calculus dependent on geography and contract terms); the issue for the industry this year is unsurprisingly European energy given the post-Ukraine spike in natural gas prices; while energy is estimated to be only LSD% of total COGS, the unprecedented spike has led to increases in near term costs; the good news is that this cost will all be contractually recaptured in 2023; importantly, the company is actively working with its customers to recover these cost increases sooner (split between 2022 and 2023) as the customers have been able to raise price at retail    
  • 2023-2024:  the main driver of management’s disclosed multiyear projections is the aforementioned $1.8B of new capacity; other major assumptions are based on already contracted business in the existing book / normal contract roll cadence and do not assume incremental pricing gains; link to slide deck, excellent detailed document  (https://www.sec.gov/Archives/edgar/data/1816816/000119312521051423/d61123dex992.htm)

Catalysts:  (i) new capacity comes online and delivers projected EBITDA, (ii) beverage can industry volume growth remains robust, currently in shortage and eventually in a healthier balance, (iii) large global beverage companies more aggressively move still water to aluminum cans and/or states like CA+FL move forward with single use plastic bottle bans, (iv) capital return begins/recognized, (v) de-levers balance sheet and takes out small non-convertible preferred (callable any time at par)

Risks (mitigants):  (i) execution of new capacity (largely lower risk brownfields and additional lines), (ii) all major players are adding material new capacity over the next several years to first relieve the need for imports and well as to satisfy projected demand and may overbuild (rational oligopoly, all industry capacity being built subject to long term contracted volumes, large players have older higher-cost capacity to take offline if/when needed), (iii) some tailwind during COVID from beverages consumed at home vs. on-premise may reverse (manageable), (iv) aluminum prices are recently higher and industry reliant on 3rd party rollers of can sheet (oil/plastics prices are recently higher as well - this plus recyclability limits substitution risk, in addition 2 very large new US can sheet rolling plants recently announced relieving future import/shortage risk), (v) parent overhang stock and earnout (very successful sophisticated owner fully aligned), (vi) trades with/viewed as de-SPAC (stigma diminishes over time as execute)

Valuation / Summary:

• (i) Cheap absolute (8.6x ’22, 6.8x ’23 Adjusted EBITDA) and relative to BALL and CCK (3-4x current discount) + pays an attractive current 6.7% dividend + large new buyback, (ii) best growth prospects as projected to double Adjusted EBITDA to $1.1B by ’24 based on long-term fully-contracted pre-sold capacity expansion that is both fully funded and approaching completion (with additional material expansion opportunity thereafter via Stage 2)
• Project the company is trading at low-mid double digit FCF yield on an operating basis (Defined as:  Adjusted EBITDA – interest – cash taxes – working capital – maintenance capex – preferred dividend)
• Believe that by the end of ’23, the company will have both demonstrated its resilience and completed Stage 1 of growth capacity expansion resulting in >$1B EBITDA of earnings power; at 10x Adjusted EBITDA and including common dividends paid in the interim, total return would be $11.30 per share, up 92%; given the material growth prospects at that point from Stage 2 capacity expansion (which will be then largely complete), at 12x Adjusted EBITDA, total return would be >150%

Notes: (i) AMBP deal was initially priced at 12x Adjusted EBITDA, a 3-5x discount to BALL and CCK at the time, (ii) since 2015, BALL has traded between 12x-19x EBITDA, and CCK’s beverage can assets have historically been valued at a 2-3x discount to BALL, (iii) when AMBP was still part of publicly traded ARD, sell side sum-of-the-parts analyses valued the assets that now comprise AMBP at 13-14x EBITDA   

Appendix:     

• Industry history:  (i) all companies built initially by buying the canning assets out of large CSD companies (KO, PEP, etc.) and brewers (ABI, Coors, Heineken, etc.) as these companies focused on core marketing, products, etc.; (ii) very regional protected business as need to be located close to fillers (shipping lot of air, ~200 miles max radius), in many cases co-located, (iii) operate under multiyear (3-5yr) converting contracts as all underlying aluminum commodity risk and other major cost items are passed through, (iv) produce mix of standard 12oz and higher margin/differentiated specialty cans/better marketing and printing, (v) high barriers to entry given shipping radius, capital intensity, need for large network/footprint of plants to logistically serve huge global customers, (vi) make more money on smaller players, less a toller/converter and more priced for value
• ESG:  aluminum is best substrate from both cost and sustainability perspective; low comparable cost to serve; infinitely recyclable; 75% of aluminum ever produced remains in use; costs 90% less to use recycled aluminum vs. virgin; most developed recycling systems get cans back on shelf in 60 days; >50% recycling rates in US (75% Europe, 98% Brazil) vs. ~25-30% for plastics and glass
• Comps: 
  • Industry has consolidated over the decades; biggest comps were Ball, Crown and Rexam; Ball (BALL) is bellwether, tried to take out Rexam to create a duopoly and failed, ended up having to sell high quality assets to Ardagh; Rexam was historically the weakest player and market became more rational post that deal
  • Crown (CCK):  rational actor; have material assets outside of 3 core markets US/Europe/Brazil; recently completed a strategic review, sold part of large global food can biz, kept transit packaging asset that came out ill-advised Signode acquisition 
  • CanPack:  well-run rational privately owned Polish company, smaller presence in US and Brazil where adding capacity, issues public bonds, reports numbers
  • Metal Container Corp (MCC):  legacy ABI assets, largely 12oz assets supporting parent company ABI internal volumes, not doing much 3rd party business; assets are owned in a levered JV with Apollo/Athene where they are run for cash/yield under a long term supply agreement with ABI
• What has changed:
  • Beverage cans historically a low growth / high FCF business; legacy market was dependent on big beer and carbonated soft drinks and took share from glass over time; North American most mature with better growth historically in Europe (lower can penetration/capita and favorable law changes in Germany) and Brazil (move away from returnable glass)
  • In last 3-4 years, beverage cans have benefitted from structural tailwinds from combination of (i) sustainability trends driven by consumer preference, (ii) costs, (iii) proliferation of specialty can shapes/sizes (>50% the market) and can premiumization have all led to large shift in pack mix into cans in both the fastest/newest beverage segments (energy drinks, craft beer, RTD coffee, sparkling water, teas, spiked seltzers, wines, RTD cocktails, health/wellness) as well as legacy segments (big beer, CSD, now even still water); cans now have >75% share new products pack mix vs ~30% historically and all new filling lines are largely for cans
  • These structural changes in aggregate have led to record demand, sold out markets, and now a material shortage of cans in the US and Europe which had to be satisfied with unprecedented imports; this all occurred at same time as multiyear contracts rolled off and leverage on price and terms (longer contracts, escalating min/max commitments, take or pay) shifted to canmakers
  • These trends continue to accelerate and all major players have announced large fully contracted capacity plans for next 3+ years to support industry growth; to date the new capacity is largely in the abovementioned categories, and not yet from substrate shift from plastic (due to installed filling capacity with 68% of all beverage packaging still in plastic)
  • Water is a big future opportunity; order magnitude example: estimate that for each 1% shift from plastic to can = need for 18B more cans globally; Dasani (KO) and Aquafina (PEP) are both trialing cans to compete with new entrants who have launched in the can
  • Assuming market grows 4-6% by abovementioned factors, supply/demand should come into balance by 2024 into 2025 relieving the import need; industry has never built this much this fast before and will likely be delays/hiccups extending the supply/demand

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Catalyst

(i) new capacity comes online and delivers projected EBITDA, (ii) beverage can industry volume growth remains robust, currently in shortage and eventually in a healthier balance, (iii) large global beverage companies more aggressively move still water to aluminum cans and/or states like CA+FL move forward with single use plastic bottle bans, (iv) capital return begins/recognized, (v) de-levers balance sheet and takes out small non-convertible preferred (callable any time at par)