Packaging company Pact Group Holdings Ltd (ASX: PGH) debuted on the ASX on Tuesday morning at $3.50, 7.8% below its listing price of $3.80. By midday it had recovered slightly to $3.59 on decent trade volumes to value the company at a little over $1.1 billion.
Pact is the second-largest IPO of the year and investors will be hoping it can emulate the success of its Australian-listed but global peer Amcor (ASX: AMC). Amcor has diversified earnings across Asia, Europe and the U.S. It has delivered returns of over 200% to investors since 2009. On 18 December, just a day after Pact's IPO, Amcor will split its business in two; Orora, which will handle its Australasian fibre and beverage packaging business and a US distribution network, and the new Amcor that will manufacture packaging for the healthcare and tobacco industries, primarily overseas.
Pact will compete closely with Orora following the split and the team at the Australian Financial Review conducted an analysis of how the companies compare. Pact's main service is converting plastic resin and steel into rigid plastics and metal packaging for the food, dairy, personal care, household consumables, chemical and agricultural markets. Orora meanwhile, produces fibre and glass beverage packaging in Australasia, while its U.S. distribution arm is dedicated to the distribution of packaging materials.
Both companies derive all packaging revenue from Australasia and Asia, however Pact services a much broader range of industries and has an estimated 40% of the Australian market for rigid plastics. This will be an opportunity for Orora to gain some market share in coming years, as the new management team have a mandate to grow the business both in Australia and overseas. In terms of margins, Pact is forecasting 2014 earnings before interest, tax, depreciation and amortisation (EBITDA) margin to be 16.9%, well above that of Orora at 8.5% and the median of its peers at 13.4%. Similarly, Pact has demonstrated strong cash flow in recent years and has forecast a cash flow margin of 13.9%. Above all peers and well above Orora's estimate of 3.5%.
Foolish takeaway
On these numbers alone, Pact appears to stack up well against Orora, however some commentators have baulked at Pact's high debt load (90% of shareholder equity) and extensive cross holdings between related parties (family-owned preferred suppliers). Pact is valued at a 2014 forecast price to earnings ratio of 13.4, compared with Amcor's 16.2. It is forecast to deliver a 5% yield franked at 65%. The company is certainly worth a look for defensive investors after medium to long-term growth.
