Is the sharp slide in Pact Group Holdings Ltd's (ASX: PGH) share price about to come to an end?
The stock jumped 0.7% to $5.16 this morning when the S&P/ASX All Ordinaries (Index:^AXAO) (ASX:XAO) has dropped 0.3% into the red.
The bounce in the packaging company's share price is a long time coming with the stock shedding 30% of its value in the past four months after management gave a downbeat forecast for its FY17 results, as it expected flat underlying performance if earnings from recent acquisitions were excluded.
It appears Pact Group may not have even achieved that – at least not from an earnings before interest and tax (EBIT) perspective. If we subtracted the earnings contribution from acquisitions, group EBIT would have slipped 4.6% instead of improving 4.3% to $169.4 million.
What's more, the outlook for its rigid packaging business (the biggest contributor to group revenue) is still subdued and margins are under pressure from the ramp up of its Jalco contract and higher energy prices.
However, everything has a price and I think the stock's recent decline more than makes up for these negatives. After all, there are a number of bright spots in its results that makes me think that the stock will find buying support around the $5 mark.
For one, management is forecasting growth in FY18. If Pact can deliver a modest 5% improvement in its bottom line, I estimate that the stock will trade on a price-earnings multiple of around 14.5 times for FY18 and a gross yield of 5.5% (assuming 40% franking credits).
That should be a reasonably easy growth target given that management can drive growth through synergies from acquisitions and its cost cutting programme. It is also expanding into other categories (such as crate pooling) that offer higher growth rates than rigid packaging.
Its P/E and yield aren't too shabby for a stock that offers relatively defensive earnings, strong cash conversion rates and with offshore exposure (it has operations in the US, Asia and New Zealand as well as Australia).
In contrast, fellow packaging peer Amcor Limited (ASX:AMC) is trading on a forward P/E of around 20 times and a yield of 3.5% (it doesn't pay franking credits).
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