Shares of Silgan Holdings (NYSE:SLGN) have been trading quite range bound and stable in recent years. The packaging firm has gradually grown sales in the past, while maintaining margins and gradually returning money to investors.
This over time has creates solid value for investors as shares now trade at non-demanding valuations after volume trends in the industry have been dismal amidst inflation in food prices. This is weighing on the shares, but as stabilization is seen around the corner, and a nice substantial deal has been announced, I am turning more upbeat, although mindful of the leverage employed here.
Sustainable Packaging For Essential Products
The paragraph header is the mission of Silgan. Since its founding in 1987, Silgan aims to compete and win in the markets in which it serves by being the best at what it does.
Over time, Silgan has grown to become a global leading supplier of sustainable rigid packaging solutions for consumer product goods. The company operates over 100 facilities across four continents, employing some 14,000 workers, which combined generate over $6 billion in annual sales.
The company offers dispensing, specialty closures, metal containers and custom containers for many consumer packaged brands companies over the world.
The company has a pretty solid track record, having grown sales from about $4 billion to $6 billion over the past decade, as a cumulative 50% revenue growth over this period of time can be called decent. Moreover, it managed to grow operating margins from high single digits towards 10% of sales, all while the share count has been reduced by fifteen percent.
All this has been reflected in the share price, which in a pretty stable fashion has gradually risen from levels around $25 per share in 2014, to levels around the $50 mark today.
Zooming Into The Performance
In January, Silgan announced its 2023 results, a year in which sales were down 6-7% to $5.99 billion, attributed to widespread volume decline in food amidst the impact of inflation. Despite the deleveraging on the topline, margins were pretty decent, as GAAP operating profits of $595 million translated into margins around 10% of sales.
On the bottom line, a GAAP profit of $2.98 per share was reported on a share count of 109 million shares. Adjusted earnings were reported at $3.40 per share, mostly after backing out amortization charges, down from a $4.01 per share number in 2022.
The softer performance was seen across all the three reportable segments of the business. The largest metal containers business saw sales down 7% to $3.14 billion, while posting margins around 9%.
Dispensing and closure sales were down 4% to $2.22 billion, with segment margins being quite strong at nearly 13% (even as margins came down a bit). Custom container revenues were down nearly 14%, but with a $626 million sales contribution, this is the smallest business division of Silgan.
On top of the 109 million shares outstanding trading around the $45 mark, the $4.9 billion equity value was just part of the story as the company carried a $2.8 billion net debt load as of the end of 2023. Pro forma, this yields a $7.7 billion enterprise valuation. Based on a reported EBITDA number (so excluding adjustments) of $881 million, leverage ratios were full at 3.2 times.
Trying to revamp the performance, the company announced a $50 million cost saving program alongside the release of the 2024 results. Anticipated improvements in the business were confirmed with the 2024 guidance. The company guided for unspecified volume growth across the business, with adjusted earnings seen up to $3.55-$3.75 per share, which at the midpoint would be up 7% on the year before.
So early in the year shares were trading at a relatively modest valuation of around 1.3 times sales, 8.7 times EBITDA and at 12-13 times adjusted earnings. Trading around $45, shares have seen little volatility, only having peaked in the low fifties in 2022 in what was the peak year so far.
Picking Up The Performance
In February, Silgan announced a 5.6% increase in the dividend, although that a quarterly payout of $0.19 per share yields a relatively modest 1.7% dividend yield.
In May, first quarter sales were reported down 7% to $1.32 billion, with adjusted earnings down 9 cents to $0.69 per share. Despite this softer start to the year, the company maintained the full year guidance, as it called for growth in the second quarter.
Alongside the first quarter earnings report, management touted customer wins and specifically guided for volume increases in each of the important segments, as comparables become easier as well of course.
Net debt actually ticked up to $3.57 billion as of the end of the first quarter amidst poor working capital conversion, although much of this seems seasonal, and therefore should ¨bounce back¨ in the near term.
A Big Deal
Towards the end of July, Silgan announced a substantial deal as it reached an EUR 838 million deal to acquire Weener Packaging, a producer of differentiated dispensing solutions for personal care, foods, and healthcare products. With the deal, Silgan will acquire operations in Europe and North America, and add another 4,000 workers to its payroll.
With a purchase price equal to $900 million, the deal is substantial, equal to about 12-13% of its own enterprise valuation here. The acquisition will add some EUR 450 million in sales, suggesting that a 1.9 times sales multiple has been paid, a premium compared to its own valuation.
The reason for that is simple. An EUR 96 million EBITDA contribution suggest that the business posts EBITDA margins of around 21%, while Silgan´s margins come in the mid-teens. An 8.7 times EBITDA multiple is in line with its own valuation, as realization of EUR 20 million in synergies within 18 months could drive real accretion.
All this looks quite upbeat. Assuming a $2.8 billion normalized net debt load as of end 2023, I peg pro forma net debt at $3.7 billion (assuming the first quarter cash flows normalize). Combined with pro forma EBITDA near $950 million, and a bit above that following realization of synergies, leverage ratios tick up by about 0.7 times to 3.8-3.9 times.
Shares of Silgan have risen by a percent, having increased some $50 million in response to the deal announcement which is a statement that the deal looks appealing, although that leverage will increase a bit.
A Final Word
The truth is that a current 12-13 times earnings multiple looks pretty reasonable, as $20 million in synergies alone have the potential to boost after-tax profits over time by about $0.15 per share, opening up the road for earnings to grow towards $4 per share again, thereby lowering the earnings valuation multiple by a turn.
The earnings yield is large and that is needed given that quite some leverage is employed, as the dividend yield is relatively modest, thereby aiding the pace of deleveraging. All this is comforting and needed as while the long term performance of the business is solid, the same does not apply to the more recent performance.
However, if growth can return, and also EBITDA can grow, which helps in a quicker deleverage path, I am gradually turning more upbeat. Recognizing that valuations in the sector are relatively modest, I see room for Silgan to deliver on a solid long term returns to investors. Next week’s second quarter earnings release will be key and interesting, to see if promised volume growth has arrived, and to learn more on the Weener deal.
I lack conviction to size up, as innovation remains a key point of attention here amidst the ESG wave, having a profound impact on the wider sector as well.
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