WEEKLY STOCK COMMENT: PACT GROUP
Roy Davidson, 12 April 2018
Pact Group (PGH) is a leading supplier of rigid plastics packaging and related products in Australia and New Zealand, with an emerging presence in Asia. PGH supplies packaging and related products for customers in the food, dairy, beverage, personal care, household consumables, chemical, agricultural and industrial sectors.
The majority of PGH’s revenue is generated through the sale of rigid plastics packaging and related products to the consumer sector with the balance derived from industrial packaging and other non-packaging sectors. The company’s key products include yoghurt, cream and ice-cream containers, milk and beverage bottles, margarine tubs, food jars, plastic tubes and cartridges, steel drums, reusable materials handling products, plastic crates and other customised products for the consumer and industrial sectors. PGH has more than 70 operating sites across Australia, New Zealand and the higher-growth Asian markets.
The rigid plastics packaging industry in Australia and New Zealand has been highly fragmented, predominantly made up of many small niche businesses, but has seen significant consolidation in recent years. The company has demonstrated a track record of disciplined acquisitions and has a clearly defined method of integrating acquired companies by putting them onto its own centralised procurement, reporting and shared services platforms thereby achieving synergies. More recently, the company has moved outside its traditional packaging sector into contract manufacturing and materials handling.
PGH has established long-term relationships with a wide range of blue chip customers across defensive end-markets, particularly in the consumer sector. Customers include Goodman Fielder, Coles, Fonterra, Unilever, Woolworths, Foodstuffs, Lion, Heinz and Caltex. The company’s top 30 customers contribute less than half of sales revenue, with no one customer contributing more than 10% of revenue. PGH’s top ten customers have an average length of relationship of more than 10 years.
PGH is a high quality industrial exposure to Australia and New Zealand, with Asian growth aspirations. PGH has industry leading margins, an attractive dividend yield, and relatively defensive earnings. The company’s cost-out programme should deliver earnings growth while the recent acquisitions open up adjacent opportunities in the contract manufacturing and materials handling sectors.
Risks for PGH include 1) increased competition, 2) cost increases, and 3) lack of ability to integrate acquisitions.