I have been closely following Ardagh Metal Packaging (NYSE:AMBP) since its debut as a publicly traded company following a spinoff from the Ardagh Group, its majority shareholder. Shareholders of AMBP have faced challenges, with the stock price experiencing a significant decline despite the company offering a generous dividend. Despite this, my confidence in the aluminum can business led me to continue investing in AMBP, anticipating a decrease in growth capital expenditures as the company’s sustained free cash flow remained robust.
The turning point for AMBP is expected to occur this year, with the dividend likely to be fully covered. However, I believe it would be beneficial for the company to consider reducing the dividend and using the excess cash flow to repurchase debt on the open market to manage future funding costs.
The company has shown strong performance in the beginning of the year, with positive outlooks for Q2 and FY 2024. Volume growth has been reported in all markets, particularly in the Americas, and EBITDA exceeded expectations due to higher volumes. While total revenue saw a modest increase, a decrease in cost of goods sold resulted in a significant rise in gross profit.
Despite reporting a net loss, AMBP’s cash flows remain a key focus for investors. The company’s heavy investments in production growth are nearing completion, leading to an expected improvement in free cash flow. Adjusting for working capital investments, the company is nearing breakeven on reported free cash flow, with sustaining free cash flow expected to improve in the coming quarters.
The company’s capital allocation priorities remain a concern, with the dividend weighing on net debt levels. While the dividend is expected to be fully covered by sustaining free cash flow, attention to debt management is crucial. Opportunities for debt reduction through bond buybacks below par should be considered to accelerate the pace of debt reduction.
In conclusion, despite concerns about capital allocation and corporate governance, I maintain a significant long position in Ardagh Metal Packaging. The stock’s valuation remains reasonable, and a reduction in debt levels could boost market confidence in the company’s turnaround.