Description

Security:                  AMBP COMMON STOCK

Recommendation: LONG

Current Price:          $9.61/shr

Market Value:         $5.8BN

Enterprise Value:    $8.2BN

Executive Summary

Ardagh Metal Packaging S.A. (AMBP) is a manufacturer of aluminum beverage cans and was acquired in August by Gores Holdings V (GHV) in a SPAC transaction that at the time valued the company at ~$8.5BN TEV or ~15x 2020 Adj. EBITDA. At first glance, the multiple appears rich, both relative to the comps (Ball and Crown trade at ~14x) and certainly not in the traditional vicinity of mispriced. However, historical numbers don’t present an accurate picture of AMBP’s future prospects - the industry is seeing a positive step function in demand and I expect AMBP to benefit from robust multi-year beverage can growth outlook in all its key regions. The company has embarked on a self-funded capacity expansion project that is expected to double Adj. EBITDA over the next 3-4 years from $545MM in 2020 to over $1.1BN in 2024. On a steady-state basis, cash flow conversion is ~75% (using maintenance capex) and after-tax free cash flow (ATAX FCF) is expected to reach $1.00-1.15/shr range (depending on the share count) by 2024 – at the current price of $9.61, the stock is trading at ~8.5x 2024 steady-state ATAX FCF; applying a 16x FCF multiple (10-11x Adj. EBITDA) values the stock in the $16-18 range, ~65-85% upside from here.

Brief Description/History

AMBP is a leading supplier of sustainable packaging globally and is the only 100% beverage can pure-play of scale. It is one of the top three producers of consumer metal beverage cans in a market that is 85% controlled by the top three players (Ball Corp (40%), Crown Holdings (34%) and AMBP (11%)) and is #2 or #3 in each of its end markets. End user categories include beer, carbonated soft drinks, energy drinks, hard seltzers, juices, teas, sparkling water and wine. Industry revenues are currently ~$33bn with +360bn cans produced globally. AMBP produces cans for some of the leading beverage brands in the world (such as AB InBev, Coca-Cola, Heineken, Monster Beverage and PepsiCo; top 10 customers represent ~65% of revenue) and +80% of its sales are generated under multi-year contracts (generally two to seven years) with the remainder subject to annual agreements. The majority of contracts include input cost pass-through provisions to account for fluctuation in the raw material costs, principally aluminum (95% of raw material spend).

Until early 2021, AMBP operated as a division of the larger Ardagh Group and was separated into AMBP as part of the SPAC transaction in Q1-21. AMBP is still majority owned by the Ardagh parent, is incorporated in Luxembourg, has 24 production facilities across nine countries (US, Brazil and several locations in Europe) with annual capacity of 39bn cans and 4,900 employees. For FY 2021, the company is expected to generate $3.8bn in revenue (11% growth y/y) and $660MM in Adj. EBITDA (21% growth y/y). Net leverage is currently 3.7x on 2021 Adj. EBITDA and expected to drop to 3.0x next year. The business is split ~54%/~46% between the Americas and Europe and its beverage cans are 100% infinitely recyclable.

Brief Background: Sponsor and SPAC Transaction

Sponsor:

The sponsor is an experienced private equity investor in the SPAC market. This is the seventh transaction for Gores and brings combined transaction value to +$35bn. Prior deals include Hostess (+100% in ~5yrs), Verra Mobility (+60% in 3yrs), PAE (flat in 2yrs), Luminar (+70% in +1yr), UWM (-25% in ~1yr) and Matterport (+150% in 9m). Purely based on the stock price trajectory, Gores has done a reasonably good job making money for shareholders in five out of the seven prior companies it has brought public.

SPAC Deal:

In consideration for the deal, the Ardagh Group received 82% (493.8MM shares) of AMBP stock, $3.4bn cash and the contingent right to receive 60.7MM in earnout shares over a ~5.5yr period in equal installments upon the achievement of certain stock price thresholds (ranging from $13 to $19.50/shr, currently booked as a $282MM liability for AMBP).

Capital Structure

Industry Dynamics  

The global market for beverage packaging is currently estimated to be ~$150bn with metal/cans making up ~22%. The other material types include glass and plastic (both in the 35-40% range) with the residual made up by paper/paperboard. Due to a few megatrends (see below), the industry is experiencing an inflection point in demand where industry growth is expected to grow from 3-4% historically to 5-7% going forward in established markets and +10% in higher growth economies like Brazil. Most industry publications expect the overall beverage packaging market to grow at a CAGR of 5% between 2021 and 2026 and the metal/can market to exceed that growth given that an estimated 75% of new beverage product launches (new categories, new products and product extensions) are now in aluminum cans. Broadly speaking, cans have always been more cost efficient in terms of recycling and transportation than the other beverage categories. Specifically, the recent megatrends include:

1. New beverage categories: hard and flavored seltzers, sparkling waters, ready-to-drink (RTD) coffees and teas.

2. Move towards sustainable packaging: structural shift from glass and plastics packaging to more environmentally friendly aluminum beverage cans. Brazil is one such example that is moving away from returnable glass packaging to one way can packaging and this is expected to be a tailwind for the next 5-10 years. The continued relationship with the Ardagh Group is particularly relevant given that Ardagh has large glass relationships which complement AMBP’s beverage can business with large global customers. As such, AMBP is in an almost unique and highly privileged position with these customers as they initiate or continue their transition to sustainable packaging. In terms of plastics, given the industry’s intensifying regulatory and consumer pressures, the conversion opportunity seems significant. To put the shift in perspective, it is estimated that a 1% shift in plastic capacity would translate to a 5% increase in beverage can volume demand. Brands such as Dasani (Coca-Cola) and Aquafina (PepsiCo) have just started the shift.

3. Growth in ‘specialty cans’: ‘specialty’ is defined as sizes other than the ‘standard’ can diameter of 12-ounce beverages. The market for specialty cans has grown faster than standard in recent years due to high demand from consumers seeking more size variety from their choice brands. The standard size currently accounts for ~73% of the beverage can market. Since the business was acquired in 2016 by the Ardagh Group from Ball/Rexam, mgmt. has invested heavily in specialty cans, growing the business to 43% of capacity in 2020.

Capacity Expansion Project:

In late 2020, prior to the announcement of the SPAC transaction, mgmt. of the Ardagh Group’s metal packaging business (now AMBP), disclosed plans for a multi-year $1.8 billion business growth investment program commencing in 2021 to expand the company’s beverage can capacity by ~55% in volume (incremental ~21bn cans, bringing total can capacity to ~60bn per annum). Salient points of the program:

·   No speculative capacity build: nearly all new capacity is fully backed by long-term customer contracts with cost push-through provisions – while the market is expected to grow 5-7% over the next several years, AMBP is expect to significantly outpace that growth rate (11-12% CAGR) by expanding capacity in higher growth products and with faster growing customers and in faster growing markets (Brazil), and NOT by taking share.

·   Leverage existing infrastructure and minimize execution risk: the company is focused on expanding existing facilities in the US, Europe and Brazil. +90% of new capacity is associated with expanding existing plants. The one contemplated greenfield project is in Brazil and will be constructed by the same team that built the prior greenfield project in 2018 and use the same supplier base and external contracts as the other Brazil projects.

·   Specialty can expansion: faster growth and higher margins than standard; represents over 80% of the capacity expansion under the $1.8bn program, following which specialty cans will represent 55-60% of total capacity (from 43%)

·   No equity raise anticipated: the total cost for the program is fully funded by internally generated cash flow and on balance cash/liquidity (ABL)

·   Operating leverage through mix shift (more specialty) and fixed cost absorption: assuming very little increase in revenue per can over the next 3-4 years (+4%, 9c/can), gross margin per can is expected to increase ~26% (from 0.018c to 0.023c/can). As a result, Adj. EBITDA margins are estimated to improve to +20% in 2024 (from 15.8% today).

·   Attractive ROIC: the $1.8bn is expected to generate an additional ~$400-500MM in Adj. EBITDA on an annualized basis, which simplistically equates to ~25% pre-tax annualized return on capital

Financials/Valuation

Risks/Downside:

1. Oversupply: A key driver to the investment is the structural shift in industry growth and the thesis that the new capacity coming online will be absorbed by consumer demand.

Risk: New capacity will lead to oversupply.

Mitigant: New capacity is secured by long-term contracts; the company is nearly 100% contracted for 2022 and largely contracted through 2024. In recent months incumbents have seen an acceleration in contract renewals and an increase in contract duration as customers appear very focused on securing sufficient can supply to support their growth initiatives.

2. Valuation: Another key driver to the thesis is the undervalued stock price based on steady-state cash flow numbers in 2024.

Risk: The market doesn’t give credit to expected performance so far in the future, irrespective of contract certainty.

Mitigant: Based on a more 'readily visible' benchmark, AMBP is still significantly undervalued - on an Adj. EBITDA basis, AMBP currently trades at 8.3x ‘23e Adj. EBITDA. AMBP’s comps, Ball (18% EBITDA margins/7% forecasted revenue growth rate) and Crown (17% EBITDA margins/4-5% forecasted revenue growth rate) currently trade at 13.3x and 10.6x ‘23e Adj. EBITDA, respectively. Applying Crown’s 10.6x multiple to AMBP’s ‘23e Adj. EBITDA and factoring in AMBP’s current leverage (giving zero credit to any deleveraging between now and 2023) results in a $13-14 stock price, a 40% appreciation. 

Catalysts:

·       Consistent 11-12% top line CAGR from substantial new capacity over the next several years to meet the significant acceleration in beverage can demand.

·       Margin accretion from improving operating leverage via changing mix and fixed cost absorption.

Catalyst

·       Consistent 11-12% top line CAGR from substantial new capacity over the next several years to meet the significant acceleration in beverage can demand.

·       Margin accretion from improving operating leverage via changing mix and fixed cost absorption.