Ardagh Metal Packaging S.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Ardagh Metal Packaging S.A. (AMBP) is a global supplier of infinitely recyclable metal beverage cans, operating across a wide array of geographies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Ardagh Metal Packaging S.A. (AMBP) is a leading global supplier of infinitely recyclable metal beverage cans. The company operates across Europe, the Americas, and a few facilities in the Asia Pacific, emphasizing its global reach. Their main products are aluminum and steel beverage cans. It’s important to note that a significant portion of their revenue comes from contracts with a small set of large customers across various sectors, including beer, carbonated soft drinks, and energy drinks.

The market for metal beverage packaging is driven primarily by demand from the beverages industry. While this seems straightforward, it’s actually quite diverse. Consumers are increasingly choosing beverages outside traditional categories, like soft drinks, resulting in constant shifts in product mix. Additionally, the company is seeing a growing interest in aluminum cans because of their sustainability and recyclability. The company operates at both the national and global level, where they have a global business model, and are not fully reliant on one particular region or country.

AMBP operates in a moderately concentrated market with a few large players dominating market share. Competition primarily comes from companies of similar scale and capabilities, which means pricing pressure is fairly common. Innovation and cost efficiency are key factors in staying competitive.

What Makes AMBP Unique?

Though Ardagh might appear to be operating in a commodity business, they do have some aspects that differentiate them from peers.

Scale and Global Reach: Ardagh has extensive global production and distribution networks, meaning they can offer large-scale clients stable supply in various regions. This large scale can lead to economies of scale in the production and distribution process, reducing overall operating costs compared to other, newer, and smaller competitors.
Customer Relationships: The business maintains close relationships with its customers that can help retain them in the long run. These relationships seem to come about by focusing on customer experience and creating a tailored, unique product that provides them with a better overall solution.
Focus on Sustainability: The company emphasizes its sustainability profile and efforts towards recycling, which can appeal to environment-conscious consumers and customers.

Financials Deep Dive

AMBP’s financials paint a complex picture that’s essential to unpack.

Revenue: Over the past few years, revenue growth has been affected by foreign currency fluctuations, a major component of the business. Even if revenue grows in the original currency, the conversion to the reporting currency in USD is a major factor affecting performance. This has particularly been noticed in the Americas segment, in which currency has become a massive obstacle.
Profitability: EBITDA margin appears to be fluctuating due to cost pressures and input price increases. There were improvements in operating margins in recent years. However, there were major write-offs due to impairment of goodwill, which decreased profits. Furthermore, the company faces a tax penalty, affecting its overall profitability. These can be seen in the income statement. Management is focused on reducing costs and improving operating margins in order to boost profitability.
Debt: The company carries a significant amount of debt, which has caused major increases in the interest expenses, as well as a higher debt-to-equity ratio. This makes them extremely vulnerable to fluctuations in interest rates. Due to this level of high debt, their balance sheet isn’t deemed very healthy. The debt also results in lower financial flexibility for acquisitions and investments. The company does, however, intend to reduce its debt as time goes on, to improve its financial health and give shareholders a bigger part of the pie.
Cash Flow: AMBP’s operating cash flow is positive and stable, but investments in tangible assets mean the free cash flow is inconsistent, requiring the company to focus on maintaining and creating new cash flow.
Capital Structure: The company’s capital structure involves a significant amount of debt and intangible assets like goodwill, which are highly sensitive to market fluctuations and accounting rules. The company’s net equity position is limited, thereby increasing the company’s risk to investors.

Moat Analysis - Rating: 2 / 5

While AMBP has some differentiation, its moat isn’t particularly strong.

Limited Pricing Power: Despite being a global leader, AMBP lacks pricing power, meaning it’s likely unable to raise prices beyond market averages.
Moderate Scale Advantages: The company does have scale, which helps increase efficiency and lower operating costs, although it’s very similar to other major players. Scale does give it an advantage, but doesn’t completely set it apart.
Weak Switching Costs: Customers have some level of switching cost, though nothing that is difficult to overcome, meaning they can easily choose alternative suppliers.
Limited Brand Advantage: A brand name or brand loyalty don’t have a major impact, as customers mainly purchase the can and not AMBP’s brand.

Overall, AMBP has some level of moat due to its scale, but its overall moat is rather weak. This earns it a moat rating of 2/5.

Risks to the Moat and Business Resilience

Industry Consolidation: The beer and beverages industries are consolidating, which means fewer customers with more bargaining power to negotiate prices.
Commodity Prices: Changes in aluminum and steel prices can affect operating costs, especially when contracts are of a short-term nature.
Technological Changes: Development of alternative packaging materials or new manufacturing techniques could lead to the company’s core product offerings to become obsolete.
Customer Concentration: A significant portion of their revenue is from a few major customers, so losing any of them would drastically hurt the business.
High Debt: The high level of leverage exposes the company to financial distress from economic downturns and increases in interest rates.
Currency Fluctuations: As mentioned above, significant changes in currencies are a major risk.
Regulatory Pressures: Changes in regulations regarding recycling, environmental compliance, or other industry rules will affect operations.

Despite these risks, the company has some built-in resilience. It’s a leading player with a diversified customer base and supply chain, meaning if any one source is affected, they are able to withstand that.

Understandability Rating: 3 / 5

The core business of AMBP is relatively straightforward (manufacturing and selling beverage cans). However, its global operations, complex capital structure, and heavy reliance on financial reporting make it difficult for the average investor to understand. For that reason, it earns a understandability rating of 3/5.

Balance Sheet Health Rating: 2 / 5

Due to heavy debt, large intangibles, and continued losses because of restructuring charges, AMBP’s balance sheet health is weak. This is reflected in their low credit ratings and dependence on debt markets. Consequently, a rating of 2/5 is warranted.

Recent Concerns / Controversies

Goodwill Impairment: The recent impairment on goodwill and intangible assets has raised concerns over the company’s past acquisitions and financial reporting. There are questions about if they have overpaid for companies and if the true underlying value of the acquired companies is not up to par.
Debt Reduction Concerns: While the company wants to reduce its debt, rising interest rates and slowing earnings may make it hard to do so.
Customer Loss: Losing a few key customers can cause major losses and decreased revenues that would lead to further debt problems and an inability to grow in the future.
High Input Costs: Fluctuations in aluminium, steel and other raw materials that the company uses, mean it can become more vulnerable to decreases in profitability.

These concerns are valid and should be investigated further, but if management manages to overcome these obstacles, it may be a good company with a high upside.